Photoinduced rearrangement of diarylethenes to naphthalenes or isoelectronic benzoannulated heterocycles is a novel reaction in preparative organic photochemistry. Recently it was shown that unsymmetrical diarylethenes containing benzene and oxazole derivatives efficiently undergo this transformation leading to amide derivatives of naphthalene. Mechanistic study of skeletal rearrangement for a typical representative of these compounds, namely 3-(5-methyl-2-phenyl-1,3-oxazol-4-yl)-2-phenylcyclopent-2-en-1-one, was performed by stationary and laser flash photolysis as well as density functional theory (DFT) calculations. The mechanism of the rearrangement was found to comprise several thermal stages. Both singlet and triplet states of the initial compound can be transformed to the reaction product, which results in the dependence of the quantum yield vs concentration of dissolved oxygen. Three reactive intermediates were registered in the laser flash photolysis experiment; the predicted structures were in accordance with DFT calculations of the electronic absorption spectra. In addition to the previously proposed mechanism of skeletal rearrangement based on a sigmatropic shift of hydrogen, two new parallel pathways based on formation of a carbanion/carbocation were determined.