We describe here a simple synthesis of 2-(diazoacetyl)cyclobutanones and their facile thermal rearrangement to 5-spirocyclopropyl-DELTA-alpha,beta-butenolides. The yield of the rearrangement product is high, and the reaction is completely stereospecific. alpha-Ketenylcyclobutanones have been identified spectroscopically as intermediates, and their rearrangement was studied kinetically. A strained dipolar cyclic transition is proposed for the rearrangement of the alpha-ketenylcyclobutanones to the corresponding 5-spirocyclopropyl-DELTA-alpha,beta-butenolides.