Phosphorylation regulates activity of many proteins; however, atomic level details are known for very few examples. Inhibitor-2 (I2) squelches the ubiquitous protein phosphatase-1 (PP1) enzyme activity by blocking access to the metal-containing active site. I2 Thr74 phosphorylation results in PP1 activation without I2 dissociation from the PP1-I2 complex. The dynamic disordered structure of the 73-residue segment of I2 containing Thr74, prevented visualization by X-ray crystallography of PP1-I2. In this work, I generated structures of this segment using simulated annealing to NMR restraints, fused them to the crystallographic PP1-I2 coordinates, and used molecular dynamics to study the impact of Thr74 phosphorylation on structural alterations leading to PP1 activation. Frequencies of I2 Tyr149 displacement from the PP1 active site, rotation of the phenolic Tyr149 side chain to prevent its reinsertion, and repositioning the I2 inhibitory helix to expose the PP1 active site to solvent and substrates significantly increased upon I2 Thr74 phosphorylation. After these steps, a second metal bound to produce PP1-Mn(2)-I2, which held the phosphorylated form of I2 to its active site less tightly than it held dephosphorylated I2. I2 Thr74 lies on the edge of variable dynamic communities of residues where it forms various allosteric pathways that induce motions at the PP1 active site 20Å away. These molecular dynamics simulations show how an unstructured region of I2 can harness enhanced rapid movements around phosphorylated Thr74 to pry I2 residues away from the PP1 active site in early steps of PP1-I2 activation.