A Mg-ATP-dependent protein phosphatase has been reconstituted from the catalytic subunit of protein phosphatase-1 and inhibitor-2, and consists of a 1:1 complex between these proteins. Activation of this enzyme by glycogen synthase kinase-3 and Mg-ATP results from the phosphorylation of inhibitor-2 on a threonine residue(s) and is accompanied by the dissociation of the complex. The results prove that protein phosphatase-1 and the Mg-ATP-dependent protein phosphatase contain the same catalytic subunit, and that they are interconvertible forms of the same enzyme.