Crisis? What crisis?

In a Tudorbethan pub on the edge of an industrial estate in Chertsey, John Hannah, Joanne Whalley, Julie Walters and Tom Wilkinson are having a row about adultery, cancer, death, and ME. The room is as hot and malodorous as the proverbial Bolivian unicyclist's jockstrap. Wilkinson is staring at the Axminster, looking like he wants it to swallow him up in its sticky folds. Walters, a bottle of Bells on the table in front of her, is getting progressively more drunk and aggressive. Whalley and Hannah are mortified – mainly because Walters is exposing the fact that they've been having an affair behind Victoria Hamilton's back.

When Lewis Gilbert, the 81-year-old director of decades of British hits – Reach for the Sky (1956), Alfie (1966), You Only Live Twice (1967), Educating Rita (1983) and Shirley Valentine (1989) – pops out from behind a flock wallpapered pillar and calls for a cut, the foursome look relieved. A woman rushes over and issues them with tiny fans, which they play over their faces to prevent their make-up dribbling into the fake whisky. When someone mentions that the Queen Mother has been scooted to hospital with heat exhaustion, and is being topped up with commoners' haemoglobin, nobody seems very sympathetic.

So what does this convocation of sweaty talent reveal about the current temperature of the British film industry? This week, in the pages of the London Evening Standard, Alexander Walker issued one of his periodic doomy splutterings about the business going to hell in a lottery-subsidised handcart. But it was hard not to be depressed by the figures: crummy returns on most UK movies, still more failing to make it into the cinemas, and the grim news that six British-American co-productions – including John Boorman's Arthurian romance Knight's Castle, three big-budget period dramas about the Brontës, Byron and James Boswell, and an erotic noir starring Ewan McGregor – have been shelved after investors pulled out at the last minute.

The British project that has enticed the former Mrs Val Kilmer away from the lucrative field of the CBS mini-series (she recently starred in the title role of Jackie Bouvier Kennedy Onassis), and into a fetid saloon at the fag end of south-west London is the work of a woman whom I discover sitting in the beer garden with a little dog called Molly.

Shelagh Stephenson was an actress herself before her play, The Memory of Water, substantially altered the direction of her career. (Just for the record, she was a participant in the creepiest scene ever broadcast on British television: a sequence from Sapphire and Steel, in which she was imprisoned in a Victorian photograph by a malignant faceless entity, who then killed her by setting it alight.) The Memory of Water, which she has now adapted for the screen, enumerates more earthly tragedies – although its theatrical afterlife has provided its author with occasional bouts of weirdness. "The German production was very strange," she recalls. "All the actors had wigs on. I only realised when we all went out for dinner and I saw that they all had completely different hair. I said, 'what's with the wigs?' They said, 'it's because we have a budget for it.'"

No such extravagance in Chertsey – unless you count the mountain of sticky buns and brownies that greets the cast as they come galumphing out into the daylight. Julie Walters, not quite realising that I'm on set in school-sneak capacity, tells me how Lewis Gilbert rarely addresses his cast by name. "Joanne's 'This Girl', Victoria Hamilton's 'That Girl', and I'm 'Madam'."

"You kinda have this prejudice against old people," adds John Hannah, "and you don't realise how deeply ingrained it is. He's very sharp. Yesterday Joanne and I were doing this big, heavy scene, and after the take he said, 'Can you do it again without all the pauses?' I said, 'Hasn't this film got an editor?' And he said, 'Yes, but film's expensive and actors are cheap.'"

After attempting to floss Molly's teeth with a switch of weeping willow, Hannah settles down at the picnic table for a talk. He's a wary interviewee. When I congratulate him on his ability to shuttle between monstrous Hollywood products and more modest British endeavours, he returns, "Do I do that?" and his eyes narrow to a mesh of Theda Bara lashes. "People only say that because I've made big films that have been made here with American money. And that's how it's always been. We don't do finance here. We do asset management and all that bollocks, but we don't finance films. It's like wind farms. We develop technology, but don't spend the money that would allow us to reap the benefits."

Hannah's regretful air is a product of recent disappointment. He has just abandoned his plans to produce a big-screen adaptation of Mr Benn, casting himself as the bowler-hatted adventurer of Festive Road, and Ben Kingsley as the mysterious shopkeeper who facilitates his teleportations. "Maybe they'll get it off the ground one day, but I think I've lost my opportunity to play Mr Benn. We went to FilmFour for money, but they turned us down. I don't know whether they were being honest or whether they were just making excuses, but they said they thought they wouldn't be able to market it." Ironic, when you can buy the T-shirts in any branch of HMV.

"One of the problems with British films is the amount of time that's been spent developing the script. There's not really money there for it, so it means that scripts are the weakest part. I know producers who've rung me and said, have you got any ideas? Because there's plenty of German money around if we can do something before September. For a lot of people it seems more important to just make a film than to try to make a good one." Younger directors and producers, he contends, are too concerned with making calling cards for potential employers in LA. "And that," he asserts, "beggars the industry." Perhaps that's why he's chosen to take direction from someone who's always been happy to maintain a long-distance relationship with Hollywood.

Lewis Gilbert's directorial career took off in the 1940s when – thanks to the efforts of Alexander Korda and David Lean – British films were gaining international prestige for the first time since the 1890s. In other words, he's seen the business through several cycles of boom and bust. But even he's anxious about the wider consequences of many British films failing to cut distribution deals or make their money back.

"It's not so easy today for independent production," he argues, "because the lottery has produced such a poor output that raising money in the City is much more difficult. And foreign sales are difficult, because British films are not so popular at the moment. Something like Billy Elliot lifts everything up, but if you get a run of bad British films, nobody wants to know."

As for The Memory of Water, he declines to engage in idle PR ballyhoo. "If you make 10 good films, eight will be successful. If you make 10 bad films, none of them will be successful. After a lifetime of doing this, I'm not going to try and predict which category this one will fall into. I'll still be bloody nervous when we show it for the first time. What I'd really like is just to make films and show them to my friends." And just for a moment, he pretends this is the case – forgetting, perhaps, that there's a small army of young British directors out there, living his daydream unwillingly. "Do come round and see my new film! But don't tell anybody about it, will you?"