The two companies are forming a joint venture to supply high-speed voice and data communications between armoured vehicles and command headquarters.
The venture, which will be based in Bracknell in Berkshire, is expected to create up to 400 new jobs in the UK.
Racal and Thomson are already bidding for a pounds 300m contract to supply the local communications infrastructure for Bowman, the Ministry of Defence's multi-billion pound radio communications project.
Racal and Thomson calculate that opportunities to introduce similar systems in the US, Europe, the Middle East and Latin America mean the entire market is likely to be worth pounds 1.5bn over the next five years.
"The formation of this new company is one of the first examples of true European collaboration in defence electronics," said Sir Ernest Harrison, chairman of Racal.
Thomson will contribute its intellectual property to the joint venture while both companies will commit some of their existing staff.
The new company is also expected to benefit from an arrangement between Thomson and Alcatel, the telecom equipment giant, which allows Thomson to adapt Alcatel's technology for military applications.
Investors gave the deal a cautious welcome, pushing up Racal shares 2p to 357.5p.
"It's an attractive deal but we would like to see some orders," said Mark Davies-Jones, an analyst at Salomon Smith Barney.
The two partners are likely to hear at the beginning of October whether they have won the Bowman contract.
However, they insisted the joint venture was not conditional on winning the deal.
Racal and Thomson argue that their bid is superior because it is based on Asynchronous Transfer Mode switching technology, now being widely adopted by telecom companies around the globe.
By using Asynchronous Transfer Mode switching technology, the armed forces will be able to communicate over the public telecom network as well as their private systems.
However, it is understood that Racal's bid is more expensive than British Aerospace's.Reuse content