There is an ongoing and tantalizing controversy regarding the mechanism of a key process in nature, C-H hydroxylation, by the enzyme cytochrome P450 (Auclaire, K.; Hu, Z.; Little, D. M.; Ortiz de Montellano, P. R.; Groves, J. T. J. Am. Chem. Soc. 2002, 124, 6020-6027. Newcomb, M.; Aebisher, D.; Shen, R.; Esala, R.; Chandrasena, P.; Hollenberg, P. F.; Coon, M. J. J. Am. Chem. Soc. 2003, 125, 6064-6065). To definitely resolve this controversy, theory must first address the actual systems that have been used by experiment, and that generated the controversy. This is done in the present paper, which constitutes the first extensive theoretical study of such two experimental systems, trans-2-phenylmethyl-cyclopropane (1) and trans-2-phenyl-iso-propylcyclopropane (4). The theoretical study of these substrates reveals that the only low energy pathway for C-H hydroxylation is the two-state rebound mechanism described originally for methane hydroxylation (Ogliaro, F.; Harris, N.; Cohen, S.; Filatov, M.; de Visser, S. P.; Shaik, S. J. Am. Chem. Soc. 2000, 122, 8977-8989). The paper shows that the scenario of a two-state rebound mechanism accommodates much of the experimental data. The computational results provide a good match to experimental results concerning the very different extents of rearrangement for 1 (20-30%) vs 4 (virtually none), lead to product isotope effect for the reaction of 1, in the direction of the experimental result, and predict as well the observed metabolic switching from methyl to phenyl hydroxylation, which occurs upon deuteration of the methyl group. Furthermore, the study reveals that an intimate ion pair species involving an alkyl carbocation derived from 4 gives no rearranged products, again in accord with experiment. This coherent match between theory and experiment cannot be merely accidental; it comes close to being aproof that the actual mechanism of C-H hydroxylation involves the two-state reactivity revealed by theory. Analysis of the rearrangement modes of the carbocations derived from 1 and 4 excludes the participation of free carbocations during the hydroxylation of these substrates. Finally, the mechanistic significance of product isotope effect (different isotope effects for the rearranged and unrearranged alcohol products) is analyzed. It is shown to be a sensitive probe of two-state reactivity; the size of the intrinsic product isotope effect and its direction reveal the structural differences of the hydrogen abstraction transition states in the low-spin vs high-spin reaction manifolds.