A novel rearrangement of S-(2-aminoethyl) thiophosphates to N-(2-mercaptoethyl)phosphoramidates was discovered and developed. The reaction proceeds smoothly at room temperature under basic conditions and the resulting thiol could subsequently be alkylated. The reaction mechanism is investigated by electron structure calculations using density functional theory at the B3LYP/6-31G(d) and B3LYP/6-311+G(d,p) levels. The calculations indicate that the reaction proceeds in a two step process when two explicit solvent molecules are included. In the presence of water the rearrangement reaction proceeds in competition with hydrolysis.