Eyes absent (Eya) is a highly conserved transcriptional coactivator and protein phosphatase that plays vital roles in multiple developmental processes from Drosophila to humans. Eya proteins contain a PST (Proline-Serine-Threonine)-rich transactivation domain, a threonine phosphatase motif (TPM), and a tyrosine protein phosphatase domain. Using a genomic rescue system, we find that the PST domain is essential for Eya activity and Dac expression, and the TPM is required for full Eya function. We also find that the threonine phosphatase activity plays only a minor role during Drosophila eye development and the primary function of the PST and TPM domains is transactivation that can be largely substituted by the heterologous activation domain VP16. Along with our previous results that the tyrosine phosphatase activity of Eya is dispensable for normal Eya function in eye formation, we demonstrate that a primary function of Eya during Drosophila eye development is as a transcriptional coactivator. Moreover, the PST/TPM and the threonine phosphatase activity are not required for in vitro interaction between retinal determination factors. Finally, this work is the first report of an Eya-Ey physical interaction. These findings are particularly important because they highlight the need for an in vivo approach that accurately dissects protein function.