The p97 AAA (ATPase associated with diverse cellular activities), also called VCP (valosin-containing protein), is an important therapeutic target for cancer and neurodegenerative diseases. p97 forms a hexamer composed of two AAA domains (D1 and D2) that form two stacked rings and an N-terminal domain that binds numerous cofactor proteins. The interplay between the three domains in p97 is complex, and a deeper biochemical understanding is needed in order to design selective p97 inhibitors as therapeutic agents. It is clear that the D2 ATPase domain hydrolyzes ATP in vitro, but whether D1 contributes to ATPase activity is controversial. Here, we use Walker A and B mutants to demonstrate that D1 is capable of hydrolyzing ATP and show for the first time that nucleotide binding in the D2 domain increases the catalytic efficiency (kcat/Km) of D1 ATP hydrolysis 280-fold, by increasing kcat 7-fold and decreasing Km about 40-fold. We further show that an ND1 construct lacking D2 but including the linker between D1 and D2 is catalytically active, resolving a conflict in the literature. Applying enzymatic observations to small-molecule inhibitors, we show that four p97 inhibitors (DBeQ, ML240, ML241, and NMS-873) have differential responses to Walker A and B mutations, to disease-causing IBMPFD mutations, and to the presence of the N domain binding cofactor protein p47. These differential effects provide the first evidence that p97 cofactors and disease mutations can alter p97 inhibitor potency and suggest the possibility of developing context-dependent inhibitors of p97.