During the development of multicellular organisms, proliferating, undifferentiated cells often transition into a differentiated and quiescent state. Programs coordinating cell cycle progression and differentiation are highly regulated to allow proper organismal growth and specification of a diverse array of cell types. Additionally, cell cycle activators are essential for regeneration following injury, while cell cycle inhibitors keep hyperplasia and tumor formation at bay. Although key cell cycle components have been studied for decades, significant points of cell cycle regulation remain uncertain. One open question is how proliferation and differentiation are coordinated during development in vivo. For my thesis work, I have utilized the developing Drosophila melanogaster retina as a model for cell cycle regulation during development and regeneration. My research has focused on two main questions: 1) what mechanisms drive quiescent cells to re-enter the cell cycle and proliferate in response to damage, and 2) how does prolonged arrest in G2 phase affect differentiation of a specific retinal lineage? Through a genetic RNAi screen, I have identified the transcription factor Scalloped as an essential regulator of compensatory proliferation following damage in the developing eye. Scalloped and its binding partner Yorkie are transcriptional regulators of the Hippo signaling pathway and promote proliferation by inducing expression of Cyclin E. My data suggest that Scalloped/Yorkie activation during eye regeneration is dependent on the Hippo pathway regulator Ajuba, which may be activated by increased cellular tension resulting from extrusion of apoptotic cells. To further understand the relationship between cell cycle phase and cell fate, I also characterized the development of a population of G2-arrested cells in the Drosophila eye. I discovered these cells are selected as sensory organ precursors and undergo two divisions during pupal development to form mechanosensory bristle groups. These bristles are located at precise positions across the adult eye. Precocious mitotic entry of G2-arrested cells results in bristles that are misplaced and disorganized. These results support a model in which G2 arrest is required for proper selection of sensory organ precursors, which in turn affects bristle positioning. This suggests G2 arrest is a developmental mechanism that helps refine differentiation.