Director Lance Daly's latest movie, Kisses, is a tender portrait of Dublin street life and one of the finest Irish films of the year. It taught Daly a few things about movie-making, too: don't work with children or animals . . . make sure nobody's happy . . . and never, ever, take jellybeans from your leading lady. He talks to Michael Dwyer

LANCE DALY'S first screen credit was as "kid with harmonica" in The Commitments. "I flirted with acting as a youngster," he says. "Then then I woke up one morning and realised I didn't have it."

He joined a band called Go Blimps Go. "I wrote songs and played some guitar. We were doing soundscape stuff. The first album was one 41-minute song, Globalglow. Nobody would play it on the radio. Nobody bought it."

A Dubliner, Daly is, I guess, in his mid-30s, although when we talked on Monday, he would only say that he's "of an unspecified, reasonably youthful age". When he was around 18, he went to DCU to do communications studies. "I think I came at the bottom of the class," he says, "but it's impossible to fail that course. I didn't really go in much."

He says he always wanted to make movies. In 2001 he made his debut as writer-director with the micro-budget Last Days in Dublin. He followed that with The Halo Effect, a low-key 2004 drama set in around and a Dublin chipper with a cast that included Stephen Rea, Mick Lally, Kerry Condon, Gerard McSorley, John Kavanagh and Laurence Kinlan. It was a baptism by fire. "These thugs burned down our chipper," Daly recalls. "The crew were threatened and mugged, and some of their cars were stolen."

His third movie, Kisses, was deservedly voted best new Irish feature at Galway Film Fleadh in July, and it marks a significant leap forward for Daly. Wonderfully natural performers Kelly O'Neill and Shane Curry play Kylie and Dylan, pre-teen neighbours on a drab Dublin housing estate. They impulsively escape their environment and their dysfunctional families, leaping on to a barge that takes them into Dublin city centre for an eventful long night's journey into day.

Dylan is quiet and shy, but he lightens up in the company of Kylie, who is exuberant, confident and protective, but vulnerable nonetheless.

Daly's assured and endearing movie artfully blends tension and humour, wittily drawing on Bob Dylan references.

"I was trying to do a racing car picture, but I had some trouble with that," Daly says. "I felt I had to make another picture rather than sitting around, talking about writing scripts, which is a trap. I felt I got it quite right on the first film and that I lost my way to an extent on The Halo Effect. On that I did a lot to keep people happy - cast, crew, finance, every single person - but nobody ended up happy. I didn't realise I had to be a total bollocks to make the picture work. On Kisses I made everyone unhappy, but they were all very happy with the end result.

"I went back to the template of Last Days in Dublin, which I felt had more of my voice in it, and I asked myself what's the smallest film I can make? There was a question about me as a director because I was still an unproven quantity, and that makes it hard to get a film financed. I came up with this story of two kids running away from home, and it was something I could do on the street."

Daly laughs when I mention the showbiz adage about never working with children or animals. "Never again work with children or animals," he declares. "The animals were okay because they were dead, but the kids were very much alive. That was a total nightmare. It wore out everyone on the film.

"We would be ready to shoot a scene and Shane would have gone off in a bad mood or Kelly would have climbed a tree. I wanted to keep their diets regular and not give them sugar, but everyone on the crew started making friends with them because they are so likeable.

"On the third day, I saw Kelly with a bag of jellybeans after lunch. I made the mistake of taking them off her, instead of getting someone to do it. She went back to the base, put a coat over her head and wouldn't come out for the rest of the day. She would only communicate through text messages from under the coat."

Casting director Nick McGinley saw thousands of schoolchildren before 30 were shortlisted. "We brought them into the office one Saturday," Daly says. "It was the Saturday from hell, with 15 boys and 15 girls. We put two chairs in the room. One was wooden and near the door, and the other was leather and further away. They all came in, groomed by their mammies, and suddenly they weren't the same as when we saw them in their schools. They were polite and a little bit terrified.

"They all chose the wooden chair. I thought from watching Kelly's tape that she had this amazing spark and that she wouldn't sit there, but she did. Then she saw the other chair and walked over and sat on it. She was the only one who did that. We all started leaning forward. Like any good actor, she let the audience come to her. She was it.

"Of all the boys, Shane was the only one who stood up to Kelly. At the audition she would tell the boys to get her biscuits or a cup of tea, but when she asked Shane, he told her to get them herself. He didn't even want to be in the film. We told him he'd get paid a lot of money and that girls would be running after him, but he didn't care. Then, when he heard he would have six weeks off school, he wanted to sign up."

Kisses was produced by Macdara Kelleher, Daly's partner in Fastnet Films. "I think a lot of people would be freaking out working with me because I push really, really hard to do things," Daly says. "There are times on set when people would be wondering why I was doing something and Mac would just shrug and say 'Wait and see'. He trusts me to melt people down and I trust him."

Daly credits the Irish Film Board and its chief executive Simon Perry for support when they sought funding for Kisses. "It was Simon Perry coming to work at the film board that changed things for me in terms of making films," Daly says. "He was very supportive. He watched the rough cut and said some things that really helped the final version.

"It was very different before he joined the film board. When we brought Halo Effectto them, there was this development process that changed something I wanted to do into something that wasn't what I wanted to do. I was too inexperienced to realise what that was happening."

Later came the challenge of securing clearances for the Bob Dylan songs featured in Kisses. "We shot the film using the Dylan music without permission," Daly says. "We went to them with the finished film and his manager liked it. If they said that we couldn't use the music or his likeness, we would have been in trouble. I think the fact that Dylan is referred to as 'a fuckin' musical god' twice in the film didn't hurt."

Looking ahead, Daly hopes someday to make his car racing movie, Suckin' Diesel. "It's a big-scale ensemble film set around a chaotic racetrack with its own set of rules," he says. "But now I've got another chaotic ensemble movie set around an illegal airport in Africa that has its own rules. The main characters are an Irish priest, an American gunrunner, a British journalist and a Danish pilot.

"I hope that means we can get an interesting international cast, and that's part of what pays for it. But I've been offered a few bizarrely large films in America next year, so I'm between doing them - which are definite jobs, and I do need a job - or betting the farm on my own project."

Daly's next screen credit will be as the writer of German director Constantine Werner's movie Queen Libussa. "It's set in the eighth century and it's about the dynasty that founded Prague. It's basically the Czech Cúchullain. I was hired to write it. I had nothing to do with the production. It all changed when they shot it. I've seen a rough cut. There was to be lots of sex and violence and magic in it, but it feels more like a lyrical story now." When I mention the possibility of seeing it, Daly drily replies: "Yeah, I believe it's got a video deal in Belarus."

• Kissesis released on November 21st