We report herein the synthesis of β-lactams via a three-component reaction of N-hydroxyanilines, diazo compounds and cyclobutenones, which proceeds through a sequential rhodium-catalyzed imine formation and a [2+2] cycloaddition with the in situ generated ketenes from the ring-opening of cyclobutenones. The reaction features broad substrate scope and simplicity of operation, affording densely functionalized β-lactams in moderate to good yields with excellent diastereoselectivity.