Aryl iodides substituted in the ortho position by OH, CH2OH, NH2, NHTs and CH(CO(2)Et)(2) groups react with vinylic cyclopropanes and cyclobutanes in the presence of a palladium catalyst and an appropriate base to afford good yields of heterocycles and carbocycles. The annulation products apparently arise by (1) palladium(0) formation and insertion into the carbon-iodine bond of the aryl iodide to generate an arylpalladium intermediate,(2) arylpalladium addition across the carbon-carbon double bond of the alkene, (3) ring-opening of the cyclopropane or cyclobutane by carbon-palladium beta elimination, (4) rearrangement of the resulting unsaturated alkylpalladium compound to a pi-allylpalladium compound by a series of reversible palladium hydride beta elimination and readdition steps, (5) anion formation by removal of a proton from the functional group present on the arene, and (6) nucleophilic substitution of the palladium by the resulting anion.