Multiply inverted balancer chromosomes that suppress exchange with their homologs are an essential part of the Drosophila melanogaster genetic toolkit. Despite their widespread use, the organization of balancer chromosomes has not been characterized at the molecular level, and the degree of sequence variation among copies of balancer chromosomes is unknown. To map inversion breakpoints and study potential diversity in descendants of a structurally identical balancer chromosome, we sequenced a panel of laboratory stocks containing the most widely used X chromosome balancer, First Multiple 7 (FM7). We mapped the locations of FM7 breakpoints to precise euchromatic coordinates and identified the flanking sequence of breakpoints in heterochromatic regions. Analysis of SNP variation revealed megabase-scale blocks of sequence divergence among currently used FM7 stocks. We present evidence that this divergence arose through rare double-crossover events that replaced a female-sterile allele of the singed gene (sn(X2)) on FM7c with a sequence from balanced chromosomes. We propose that although double-crossover events are rare in individual crosses, many FM7c chromosomes in the Bloomington Drosophila Stock Center have lost sn(X2) by this mechanism on a historical timescale. Finally, we characterize the original allele of the Bar gene (B(1)) that is carried on FM7, and validate the hypothesis that the origin and subsequent reversion of the B(1) duplication are mediated by unequal exchange. Our results reject a simple nonrecombining, clonal mode for the laboratory evolution of balancer chromosomes and have implications for how balancer chromosomes should be used in the design and interpretation of genetic experiments in Drosophila.