Standing inside Disneyland, you almost forget that Anaheim, California, exists. The park's attractions block views of the city, and piped-in music drowns out traffic noise. The place is scrubbed so clean that trash stays on the ground only seconds before being swept up.

But go outside its boundaries, and Fantasyland fades fast. Rental units and apartments overflow with resort employees. A mobile-home park sits across from a plot of land where Disney may one day add another theme park. The jewel of Disney's theme-park crown is surrounded by a vast sprawl that is home to one of the fastest-growing Latino populations in the U.S.  Anaheim has transformed itself from an aerospace-industry suburb into an increasingly vertical city.

"With Disney there, Anaheim is like Peking, with the old imperial city inside it," says Jaque Robertson, a New York architect who oversaw the design and construction of the resort district.

Adds former Anaheim mayor Tom Daly, "It's now a theme park surrounded by a metropolis."

For decades, outsiders who knew of Anaheim knew it because of Disneyland, and both were symbols of the suburban, crew-cut 1950s. But while Disneyland has remained a place apart, Anaheim has changed. The result is a new divide between the theme park and the hometown it once dominated (see slideshow). This year, Disney sued the city for the first time in the park's 50-year history, and both the company and council are headed toward an expensive municipal-ballot fight.

On the surface, the split is about zoning and whether new condos and low-income housing should be permitted in a district that had been dedicated to tourism. But the rhetoric has quickly moved into some very uncomfortable territory for Disney. The company—which famously brought wine into its Paris park to cater to French tastes and shark-fin soup to Hong Kong Disneyland—is being accused of falling out of touch with the people who live in its own backyard.

When Walt Disney approached Anaheim city leaders with plans for his theme park in 1954, they bent rules to accommodate him. The city quietly annexed county land for the park, blocked the building of a tall hotel that might affect the sight lines of park visitors, and altered street maps to give Walt the address he wanted: 1313 South Harbor Boulevard. (Since M is the 13th letter of the alphabet, 1313 is a shout-out to M.M., or Mickey Mouse.) Disneyland reciprocated by employing former city officials and paying for an annual fishing trip to San Diego for civic leaders.

For Disneyland's first four decades, Disney executives with deep local connections tended to Anaheim's happiness. Bill Ross, a senior vice president, went to college in nearby Fullerton and started out as a ride operator at Disneyland; Ron Dominguez, a former senior corporate officer, grew up on the farm that is now Fantasyland.

In the early 1990s, Disney's world began to expand. A 2.2-square-mile zone around Disneyland was designated as a resort district, and a $500 million bond was floated to improve local infrastructure. Disney agreed to pay the difference if tourism-generated taxes didn't cover the bond. Existing businesses and housing, including several mobile-home parks, were grandfathered in, but new development in the area was restricted to tourism-related uses—hotels, restaurants, and attractions—so if the time came when Disney needed to grow, it would have enough space to do so.

A dozen years later, that time may have arrived. While Disneyland represents only about 5 percent of a massive media company that includes ABC, ESPN, and Pixar Animation Studios, the resort is still the flagship, and its growth is essential to the company's future. Disneyland is the second-largest piece of Disney's parks-and-resorts division, a $9.9 billion oasis with 20 percent profit margins that provides steady cash flow for a company whose revenue can be volatile. And while its younger corporate brother, Florida's Disney World, is built on four large and thriving parks, Disneyland, accompanied by the less popular California Adventure, badly needs to grow.

Attendance in Anaheim has lagged. According to the company, Disneyland had 14.7 million visitors in 2006, nearly 2 million fewer than Disney World. And attendance was up only 1.2 percent from the previous year—less than half the 3 percent growth rate for Disney World.

If Disneyland is to keep up, it needs to expand. Disney executives are convinced they need to stop new housing in the resort district or else lose control of their destiny.

But Disney's once-cozy ties to the city have become frayed. Longtime employees who had good civic relationships have retired or departed. Disney, which has theme parks in Tokyo, Hong Kong, and Paris, replaced those local officials with executives from its parks and divisions around the world. This evolution was not part of any plan but was instead an inevitable, if unfortunate, by-product of the company's growth. Anaheim was now merely one of Disney's outposts, albeit an important one.

A MICKEY MOUSE BATTLE An aerial map shows Disneyland and the resort district.

Photograph by: Steve Granitz (Mickey Mouse)

Although the new executives knew theme parks, they didn't know Orange County, where Anaheim is located. Steven Greenhut, the senior editorial writer and columnist of the Orange County Register and a leading opinionmaker in the county, recently marveled in print that in nine years at the paper, he has had "virtually no dealing with the company."

By the time Disneyland celebrated its 50th anniversary, in 2005, one of its few executives with strong local ties was Chris Lowe, a former mayor of the Orange County city of Placentia, who had taken over the resort's government-affairs job in 2004.

"In the past five years, the company has evolved into a global organization, and the senior management moves between different locations," Lowe says. "That's been a problem for Disney. It's the growing pains of our company going global."

As Disney was distracted, Anaheim was changing.

When Disneyland opened, Anaheim consisted of industrial land and orange groves. Now Anaheim's population totals more than 344,000, making it bigger than Tampa, Cincinnati, Pittsburgh, Newark, Buffalo, New Orleans, and Orlando. In the 1990s, Anaheim had one of the largest gains in share of Latinos in the United States, from 31 percent to 47 percent. Some of these new arrivals have been middle-class families from Los Angeles seeking better homes; others have been Mexican immigrants attracted by the low-wage service-sector jobs available throughout the resort district.

Disney resort workers do better than many: Some are unionized and receive health benefits. But in a county where the median home price is greater than $570,000, Disney has helped create a demand for affordable housing that's not being met. A city plan meant to address the problem calls for building 1,328 affordable units during the four-year period ending in 2009, but according to the Kennedy Commission, an Irvine advocacy and policy group that studies housing in Orange County, Anaheim needs to more than triple that number to meet existing needs.

Anaheim's poorest workers cope in various ways. An estimated 1,800 motel rooms in the city are being used as permanent shelter for homeless families. Some people commute an hour from Riverside, where housing is cheaper. Others cram into apartments. In one house two miles from the resort, nine people make their home, with two bedrooms being shared by resort employees working different shifts, one man sleeping in the laundry room, and the rest filling living-room couches that were scavenged from a dumpster in nearby Seal Beach.

"It's tough," says 47-year-old Abigail de la Cruz, a banquet server at a Disney hotel, whose family of four occupies a tiny one-bedroom garden apartment about a mile from Disneyland. His teenage boys sleep in a bunk bed in the living room, climbing over de la Cruz and his wife to get to the bathroom.

The Disney dispute stems from the tension between the company's desire to control its own fate and expand and Anaheim's top priority: encouraging landowners to build more housing and retail outlets in order to accommodate the city's growth. While Disney has had its eye off the ball, city officials and developers have pushed ahead.

In 2005, SunCal, a regional developer, quietly signed an option to buy 26 acres, including the two mobile-home parks across the street from a strawberry field that Disney had long regarded as the possible site of a third theme park. The SunCal land, restricted by the provisions of the resort district, was probably worth less than $2 million an acre while it was zoned for hotels. But if a developer won the right to build housing there, it could flip the property and make as much as triple that amount.

The proposed zoning permitted 1,920 condos on the property. To sweeten the deal for city officials, 15 percent of those units would be set aside for affordable housing. SunCal allied itself with labor and housing advocates who saw the affordable-housing guarantee as a high-profile precedent that could be applied to other Anaheim projects in the works.

SunCal's timing appeared to be exquisite. Disney was preoccupied. Its executives were busy with Disneyland's 50th anniversary celebration. Ed Grier, the new Disneyland president, was still commuting between Anaheim and Tokyo, where he had overseen operations of Tokyo Disney Resort. Following Japanese protocol, he was slowly introducing his successor there to local partners. An Atlanta native, Grier had worked at theme parks in Florida and France but never in Southern California. "I was new to the area," he admits.

It took a while, but SunCal's project gained traction, despite Disney's objections. Finally, Disney realized that its walled-off world was under threat. Simply throwing a party—a time-honored Disney tactic—wouldn't be enough. Top executives at the company's headquarters in Burbank joined their Anaheim-based counterparts in shaping a fight plan. Former New York governor George Pataki, who was close to executives at both Disney and SunCal, flew in from New York to negotiate a compromise, but nothing materialized. A high-profile L.A. political consultant and a land-use attorney became part of the Disney war council.

Though these people were experienced professionals, none could claim long-standing connections to Orange County. Unable to negotiate a way out of the mess, Disney essentially stuck to the strategy of walling itself off, pursuing legal and political measures that would keep the resort district separate from Anaheim.

Disney's maneuvering initially didn't work. In April, Anaheim's city council voted 3 to 2 to permit wholly residential development on the SunCal site.

Having lost the battle on the legislative front, Disney exercised that cherished right of all Californians—to appeal directly to voters. The company and its coalition, Save Our Anaheim Resort, have gathered enough signatures to qualify for a referendum that would reverse the zoning change. Disney also launched a ballot initiative to prevent the council from making other changes near the resort.

By playing hard politics, Disney took a public relations hit. The Daily Show couldn't resist casting Mickey Mouse as the heavy. Councilmembers and housing advocates reveled in the spotlight.

"This is not, to me, about a project in the resort. This is about something that brings attention to the problem" of affordable housing, says Lorri Galloway, a member of the Anaheim council who opposes Disney on this issue. "Do you think it bothers me that the situation is negative right now? Of course not, because it won't get press attention otherwise. This whole David and Goliath thing with Disney? I love it. Call me a loser? I love it. Tell me that Disney's going to kick my ass? I love it."

Now that it has begun the battle, Disney won't give up easily. "People say Disney has never been this aggressive, and that's true. But we've never faced a situation this egregious," says Lowe, the Disney government-relations executive. "We're not like manufacturing companies, where they can go out and leave town."

The impact on Disney won't be known for some time. SunCal sued the mobile-home-park owner in October, and the developer's contract to buy the land is now in litigation. As a result, the swing vote on the five-person council indicated that she intends to reverse the council's zoning decision to allow housing on the SunCal site. That would make the referendum unnecessary and give Disney a crucial victory but wouldn't end the long-term battle. Disney still faces a ballot fight on the initiative. A vote is still six months away, though TV and radio spending has already begun. Disney's side spent more than $1.75 million on the ballot measure in the first nine months of 2007. Disney's opponents, who portray the company as a corporate bully, spent more than $600,000 in the same period.

But Disneyland's relations with its Anaheim neighbors could be forever changed. Councilwoman Lucille Kring, the swing vote on housing matters, says she sometimes imagines Anaheim without Disney. She talks longingly of the master-planned communities south of Anaheim, places like Irvine, with its upper-middle-class neighborhoods, big parks, and good schools.

"People say that if Disney were not here, we would be Garden Grove or Santa Ana," two of Anaheim's poorer neighbors, she says. "I say that if Disney were not here, perhaps we'd be Irvine. We wouldn't have all these low-skilled, low-paying jobs, and we wouldn't need the housing for those kinds of jobs. We'd have land like Irvine and could build to get the high-end jobs and the headquarters of major corporations."

Disneyland president Grier maintains that his company's initiative offers "a permanent solution to protect the resort." But there may be no permanent solutions for Disneyland in Anaheim. Other developers are planning housing developments in the resort district and criticizing Disney. The company, even with a victory in next year's election, might not be able to rebuild the wall around itself. Disney's allies in the chamber of commerce project that 100,000 new residents will settle in Anaheim in the next 15 years. And while recent trends suggest that many of these newcomers will be Latino immigrants who don't yet vote (the electorate is still mostly white and Republican), that will change over time.

To grow, Disney will need the cooperation of the new Anaheim. And some of the barriers between Walt's utopia and the real world that surrounds it will have to come down for good.

Additional reporting by David Levine.