Picture this: you are the chief executive of Ireland's foremost multimedia centre and an Academy Award nominated film producer. You have a movie script in your hand, your screenwriter at your side and you are sitting in the offices of one of the major Hollywood studios ready to talk business.

From Derry to LA. Big time.

The executive sitting opposite mentions money - $40 million, to be precise, waiting a phone call away. You slide your script across the table. All very amiable, all very LA. The executive is an Englishman, so he makes small talk complaining about the lack of football on the TV and the scarcity of HP Sauce - the usual routine. Then, as he takes the script, he adds casually: "So what do think about the political situation? Where do you guys stand?" The air turns chilly. The deal is off.

That may read like a scene from some Hollywood satire, but for Pearse Moore, chief executive of the Nerve Centre, Derry, and Oscar-nominated producer of Dance Lexie Dance, it was unnervingly real: "Myself and the writer, we just wanted to wrap it up because we knew we were wasting our time. When we left the room, the first thing we said to one another was, `4,000 miles away and the guy asks us what foot we kick with.' "

You can take the story a number of ways: as a sign of the prejudices facing Northern Irish filmmakers; as a measure of the insularity of Hollywood; as proof of the insincerity of the movie business. Or as evidence that Northern Irish film-makers have arrived. Hollywood has woken up to their talents, and they've got no qualms about telling Hollywood where to go.

Five years ago, the incredible part of that story would have been the concept of two Northern Irish film-makers discussing a multi-million Hollywood deal. But that was before Divorcing Jack.

Based on Colin Bateman's best-seller, Divorcing Jack was Northern Ireland's breakthrough, its My Left Foot. It fused home-grown talent, a local story and location filming, with "name" actors (David Thewlis, Robert Lindsay), a £3.3 million budget and a major theatrical release. It dealt with the Troubles, but was a comedy thriller; it was intrinsically "Northern Irish" but emerged at a time when world interest in - and understanding of - the North was at its zenith due to the peace process.

It was also one of a record five films shot in the North in 1997 - a phenomenon owing much to the new availability of UK National Lottery funding - and a mascot for the Northern Ireland Film Commission, also formed that year. Since then, a further eight feature films and over 60 short films have been filmed in Northern Ireland, with another 42 projects currently in development.

But the honeymoon was short-lived. The NIFC's £31.5 million grant from the EU ran out in June 1999. No feature films have gone into production this year. And Divorcing Jack, still the North's highest grossing release, took just £469,961 at the UK and Irish box office - under a sixth of its budget.

The bitter irony for local filmmakers is that it was an acclaimed, popular film. £469,961 is a good gross for a UK or Irish film (that year the acclaimed Twentyfourseven took just £235,126 while Elizabeth - a bona-fide hit - took £4,497,977), it just isn't enough to stay in business. It costs at least £3 million to make a commercial feature film, i.e. not an indie film that will play to the art-house circuit, but a mainstream feature that exhibitors can run at a multiplex alongside the latest Meg Ryan rom-com or Bruce Willis actioner.

If that £3 million seems like a paltry amount by Hollywood standards, consider this: the most an Irish film has ever taken at the home box office is £4.1 million (Michael Collins). And that's in a country where cinema attendance per person is 50 per cent higher than in the rest of Europe.

Now consider the size of Northern Ireland's population - 1,578,000 - and you'll see the crux of the problem. Even if local films reach the same percentage of the population that Titanic tapped into, they're still not going to make a profit. Local producers have to look outside their borders - and south of the Border isn't far enough. They have to look overseas. Indeed the overseas market has to be their primary market.

But are international audiences buying? Local productions Divorcing Jack, Titanic Town, All for Love and Sunset Heights all featured bankable, internationally known leads (David Thewlis, Julie Walters, Anna Friel and Toby Stephens - all English) but audiences didn't bite.

"When people see a Northern Irish product, the first thing they think of is the Troubles," says Pearse Moore. "And that in itself is something that turns an international audience off. And that's what's worrying. And I would like to see more films coming out of Northern Ireland that tell different stories."

For Divorcing Jack's producer, Robert Cooper, this is easier said than done - it's a problem he has been trying to solve for the past decade as Head of Drama for BBC Northern Ireland: "How are we going to tell stories from Northern Ireland? We have a particular brand out there. It ain't necessarily a good one from the point of view of popular culture. It doesn't say `feel good'. An awful lot of the real world in Northern Ireland is really grim and upsetting, and not what you want to deal with in popular drama. Forget the Troubles, it's about a divided society. And that's a really depressing subject. It's very hard to think of how you make entertainment out of that situation."

All of this raises a moral dilemma for local film-makers: they have the right to confront the political and social issues that affect them - there's something sinisterly Orwellian about the notion that they shouldn't - but they're also working in the commercial sector and have to bow to the demands of the marketplace. Cooper admits that Divorcing Jack's performance was hampered by its attempt to deal with the Troubles - something that could be said of the majority of the class of '97. Crossmaheart, Sunset Heights and Titanic Town all touched on the Troubles to differing degrees - and paid the price at the box office.

Unsurprisingly Cooper's latest feature, Wild About Harry, is a romantic comedy. There's no politics in it nor is it culturally specific - part of a conscious decision to pitch to a wider audience. Screenwriter Colin Bateman even cut the sectarian theme of the original story in order to foreground the relationship between Harry (Brendan Gleeson) and his wife (Amanda Donohue) - a middle-aged couple having to face the disparity between the people they fell in love with and the people they've become.

Cooper and Bateman aren't alone in sensing this sea change. Their focus on universality is shared by Dudi Appleton's The Most Fertile Man in Ireland - a romance set in Belfast about a shy geek called upon to "compensate" for the infertility of the male population - and Barry Levinson's An Everlasting Piece - a comedy about a pair of rival hairdressers who secretly conspire to corner the market in toupees (and incidentally a rarity: a Hollywood production written by and starring an "unknown" Belfast actor, Barry McEvoy).

All three are due for release later this year and could, if successful, give the Northern Irish film industry the international push it needs. If not, The Most Fertile Man in Ireland and An Everlasting Piece are from outside production companies (the Republic and the US respectively), so any failure to perform wouldn't have great repercussions for local producers. But Wild About Harry is different. A £33 million BBC/Scala production with an international cast (Gleeson, Donohue, Adrian Dunbar and George Wendt), Wild About Harry is the biggest indigenous production since Divorcing Jack, and any failure to perform could send out a grim warning to producers and investors. After all, if Gleeson, Bateman, a top-drawer supporting cast and the creative savvy of the BBC can't pull in the punters, what chance do other home-grown productions have?

And that's what it comes down to: bums on seats. Maybe the Hollywood executive who quizzed Pearse Moore on his politics had a point: he had to sell this product, first to the man with the cheque-book, and then to millions of cinema-goers around the world. Audiences are notoriously difficult to predict; you can't just put your faith in a good story and a talented director. You have to be aware of every possible nuance your product will have. And if it comes to the choice between asking offensive questions about people's politics and throwing away $40 million . . . well, for a studio exec there's no choice.

It's a sobering lesson for Northern Irish film-makers - one of many. Cinema may be an art form, but making movies is still a business.