M. Night Shyamalan, delighted after he discovered unknown Cindy Cheung, was shocked to hear that her agent demanded 1 million dollars for her role in the film. Night was prepared to pay the SAG minimum, $65,000. They settled at $100,000.
According to the book The Man Who Heard Voices, or How M. Night Shyamalan Risked His Career on a Fairy Tale, one of the reasons why Shyamalan decided to part with Disney was because Disney's president of development, Nina Jacobson took her son to a party instead of staying home to read the script for "Lady in the Water." Shyamalan had it personally couriered to her, and to add insult to injury, she didn't like it anyway. Shyamalan went off in a huff, and the "creative differences" he purportedly had with Disney was that he simply felt there was nothing creative about Disney anymore. He took the script to Warner Brothers instead, but without the usual marketing campaign that Disney promoted his other films with, "Lady in the Water" was a box-office flop.
The reason for the film's shockingly high budget despite being set in one location is because the apartment complex and the pool were built for the film. Some of this film was shot in Levittown, Pennsylvania at a Jacobson logistics warehouse site. (M. Night Shyamalan has committed to using films sites in PA.) The set, built on the warehouse site, includes the apartment complex and a half city block of row houses. Occasional footage was shot inside the overflow area of the warehouse. Most of the filming was completed after Jacobson work hours.
This movie was originally set up at Disney, but M. Night Shyamalan departed from the studio over "creative differences", and brought it to Warner Brothers. Disney has produced Shyamalan's previous four films, and the studio's subsidiary Miramax Films also produced Wide Awake (1998) which Shyamalan wrote and directed. This departure became the subject of the book "The Man Who Heard Voices: Or, How M. Night Shyamalan Risked His Career on a Fairy Tale".
Contrary to popular belief, the creatures in the film are not based on any mythological creatures and were all invented by M. Night Shyamalan. The only creature to be based off of an existing illustration is the Narf which is inspired by water sprites, nymphs, and water-faeries.
The title of the book "The Man Who Heard Voices: Or, How M. Night Shyamalan Risked His Career on a Fairy Tale" that recounted the making of the film is an intentional homage to Stanley Kubrick's film Dr. Strangelove or: How I Learned to Stop Worrying and Love the Bomb (1964).
The character of the film critic Harry Farber is named after the late critic, painter, and writer Manny Farber (who unfortunately passed away 2 years after this film's theatrical release) who was often described as "iconoclastic".