Hydroxylamine (NH2OH) is an unstable compound at room temperature, and it has been involved in two tragic industrial incidents. Although experimental studies have been carried out to study the thermal stability of hydroxylamine, the detailed decomposition mechanism is still in debate. In this work, several density functional and ab initio methods were used in conjunction with several basis sets to investigate the initial thermal decomposition steps of hydroxylamine, including both unimolecular and bimolecular reaction pathways. The theoretical investigation shows that simple bond dissociations and unimolecular reactions are unlikely to occur. The energetically favorable initial step of decomposition pathways was determined as a bimolecular isomerization of hydroxylamine into ammonia oxide with an activation barrier of similar to 25 kcal/mol at the MPW1K level of theory. Because hydroxylamine is available only in aqueous solutions, solvent effects on the initial decomposition pathways were also studied using water cluster methods and the polarizable continuum model (PCM). In water, the activation barrier of the bimolecular isomerization reaction decreases to similar to 16 kcal/mol. The results indicate that the bimolecular isomerization pathway of hydroxylamine is more favorable in aqueous solutions. However, the bimolecular nature of this reaction means that more dilute aqueous solution will be more stable.