Dimethyl homophthalate condensed with isatin to give the unexpected five membered lactone 3 rather than the half ester 1 and the δ-lactone 2. Treatment of compound 3 with excess hydrazine hydrate afforded phthalazinone carbohydrazide 4 which represents a novel method for the synthesis of phthalazinone derivatives. The carbohydrazide 4 upon treatment with carbon disulphide afforded 1,3,4-oxadiazole derivative 5, which reacted with ethylchloroacetate to give the S-alkylated product 6. The structure of compound 3 compared with 2 was discussed using hyperchem professional (7) AM 1 calculations, X-ray single crystal structure and complete spectral data.