In the morphogenetic furrow (MF) of the Drosophila developing eye, all cells arrest in G1 and photoreceptor cell differentiation initiates. As the cells exit the MF, Notch signaling is required for the uncommitted cells to enter a synchronous round of cell division referred to as the "second mitotic wave" (SMW). How cell cycle entry and exit in SMW is regulated remains unclear. Recent studies have suggested that Notch signaling controls S phase in the SMW by regulating Cyclin A and the E2F transcription factor independent of Cyclin E. In this manuscript, we investigate the developmental regulation of cell cycle entry into and exit from SMW.We demonstrate here that Cyclin E-dependent kinase activity is required for S phase entry in SMW. We show that removal of Su(H), a key transcription factor downstream of Notch signaling, blocks G1/S transition in SMW with strong upregulation of the Cyclin E/Cdk2 inhibitor Dacapo (Dap). We further show that the upregulation of Dap, which is mediated by bHLH protein Daughterless (Da), is important for cell cycle arrest of Su(H) mutant cells in SMW. Finally we show that removal of Dap leads to additional cell proliferation and an accumulation of the non-photoreceptor cells in the Drosophila developing eye.Our data demonstrate that Cyclin E/Cdk2 kinase activity is absolutely required for S phase in SMW, and that Dap is required for the proper cell cycle arrest of cells exiting the SMW. In addition, our results suggest that the G1 arrest of notch and Su(H) mutant cells in the SMW are regulated by distinct mechanisms, and that the upregulation of Dap contributes the G1 arrest of Su(H) mutant cells.