Energy efficient purification of hydrogen is an important technological challenge with broad applications in the chemical, petrochemical, metallurgical, pharmaceutical, textile and energy industries. Palladium-alloy membranes are particularly suited to this problem due to their high hydrogen permeability, thermal stability, and virtually infinite selectivity. In current systems hydrogen flux is observed to be inversely proportional to membrane thickness which is indicative of the interstitial diffusion mechanism of hydrogen permeation. This observation, along with the high cost of palladium, has motivated continuous efforts to decrease membrane thickness. Theoretical modeling of membrane performance predicts that as membrane thickness continues to decrease, eventually the permeation rate will no longer be limited by diffusion through the bulk Pd but will become limited by desorption from the permeate surface. If it exists, this is a vital transition to pinpoint due to the fact that below this thickness membrane operating conditions will have a drastically different effect on hydrogen permeation behavior and no additional performance enhancements will result from further decreasing thickness. A handful of experimental results in the open literature contradict these modeling predictions. A new model is developed in this work to explain these contradictions by considering the non-ideal behavior of hydrogen solution into metals which has been neglected in previous models. Additionally, it has been demonstrated that hydrogen permeation through bulk Pd depends on membrane microstructure, making deposition conditions and post-deposition thermal treatment important issues for repeatable performance. The interplay of these issues on the performance of ultra-thin, Pd-Ag alloy hydrogen separating membranes is experimentally investigated. It is demonstrated that the hydrogen permeation behavior of sub-micrometer thick Pd-Ag alloy membranes exhibits diffusion-limited behavior in the context of the new model. The microstructure evolution during annealing is characterized and a correlation is drawn with the observed transient hydrogen permeation behavior during initial testing of a new membrane. In addition, two distinct failure modes of the microfabricated membranes are observed and the implications for future Pd-based membrane research are discussed.