The company is developing an engine which would allow an aircraft to take off horizontally like a plane, then use a rocket engine to navigate it through space at over 20 times the speed of sound.
The engine, known as Sabre (Synergetic Air-Breathing Rocket Engine), is a relic of the UK government's 1980s Hotol space plane project, and will power a cigar-shaped plane dubbed "Skylon" by Reaction Engines.
Under the agreement with BAE Systems, the defence giant with acquire 20 per cent of its share capital, as well as entering into a working partner relationship, giving Reaction Engines access to its resources, with the aim of creating a working prototype of its engine.
The news comes after the UK government was given the thumbs-up by the European Commission in September to award a £50m grant to the company.
Mark Thomas, Reaction Engine's managing director, said the investment cleared the way for the company to move from a company "focused on research and testing of enabling technologies" to one which emphasises "the development and testing of the world's first Sabre engine".
"This partnership builds on the outstanding technical breakthroughs that Reaction Engines has made and the positive assessments received on the potential of the technology from experts at the European Space Agency and the United States’ Air Force Research Laboratory," he added.
Excited? Here's more about Skylon: