Ploidy variation is a cancer hallmark and is frequently associated with poor prognosis in high-grade cancers. Using a Drosophila solid-tumor model where oncogenic Notch drives tumorigenesis in a transition-zone microenvironment in the salivary gland imaginal ring, we find that the tumor-initiating cells normally undergo endoreplication to become polyploid. Upregulation of Notch signaling, however, induces these polyploid transition-zone cells to re-enter mitosis and undergo tumorigenesis. Growth and progression of the transition-zone tumor are fueled by a combination of polyploid mitosis, endoreplication, and depolyploidization. Both polyploid mitosis and depolyploidization are error prone, resulting in chromosomal copy-number variation and polyaneuploidy. Comparative RNA-seq and epistasis analysis reveal that the DNA-damage response genes, also active during meiosis, are upregulated in these tumors and are required for the ploidy-reduction division. Together, these findings suggest that polyploidy and associated cell-cycle variants are critical for increased tumor-cell heterogeneity and genome instability during cancer progression.