Electronics giant Pace Microtechnology has lost its exclusive contract with Sky to produce advanced set-top boxes, it was revealed today.

But the Saltaire-based firm has struck a replacement deal which it says will generate more money than before - by netting it a share of Sky's earnings.

And Pace predicts demand for its new-age digital boxes is about to go through the roof.

The company will continue to make Sky's top-of-the-range Sky Plus box - but has been told it must now share production with Essex-based Amstrad.

Under its new deal, for every box it sells Pace will take a cut of the subscription Sky charges its customers.

The arrangement brings to an end a previous contract in which Pace was forced to supply Sky Plus boxes at a loss.

Pace spokesman Helen Kettleborough said: "Up to now we have been the sole supplier of these boxes and we're so far ahead of the game it's taken Sky until now to find another partner."

Pace was one of the principal developers of the Sky Plus box, a personal video recorder (PVR) which combines a satellite receiver with a tapeless video recorder and lets users record one satellite channel while watching another.

An imminent software upgrade will allow it to record two digital programmes at once.

Pace says its faith in the product is now starting to bear fruit, and insists its earlier agreement to produce it at a loss will reap long-term benefits.

Miss Kettleborough said: "Our share of Sky's subscription means we now have two revenue streams from it.

"The new deal indicates that Sky believes the product has a real future.

"Everyone in the industry believes PVRs are going to see huge growth. They're really hot right now."

Sky is one of Pace's biggest customers - but the firm has sought to diversify its interests with the launch of a new PVR called the Twin Digital, which operates on the rival Freeview platform.

The product, which went on sale just before Easter at £350, lets viewers watch two digital channels at once on different TVs, and records programmes on a built-in hard-disk.

Critics have raved about the subscription-free Twin Digital, and Pace says initial demand is high.

But the company continues to be hit be the slowdown in demand for regular set-top boxes. It has seen its turnover fall by more than 60 per cent since 2001 and in January reported a pre-tax loss of £15.9 million. Five profit warnings have been issued in the last two years.

Around 65,000 Sky Plus boxes, all made by Pace, are believed to have been sold since the product's launch in autumn 2001. But Pace's earlier, loss-making deal with Sky has so far prevented them being a major money-spinner.

Brian Sullivan, director of New Product Development at Sky, said: "Since its launch Sky Plus has been the UK leader in the emerging PVR category. As this market grows it is critical that we have the suppliers to support demand."