Michelle,

Look into putting together a retaining wall out of stacked blocks
(pavestone.com). I just built one last month and although carrying
the blocks around was heavy work, it was super easy to build. You'll
read all this stuff about putting the blocks in many inches of crushed
rock but I didn't nor did I bury the first course and the wall looks
absolutely beautiful. The blocks were about $1.30 each from Home
Depot. The only warning I'd have is to tell your kids to stay away
from it if you build it. The blocks are a little jagged and might hurt
them. But there are other styles you can choose from.

Good luck with this, your neighbor--although sounds like a pain in the
butt--might have a point.