This paper describes a development study of a precooled-cycle hypersonic turbojet engine for the first stage of TSTO space plane and hypersonic airplane. With reflecting the key technologies accumulated from ATREX (Expander cycle ATR engine) ground tests, the next flyable subscale engine "S-engine" is now developed. S-engine has 23 cm × 23 cm of rectangular cross section, 2.2 m of the overall length and about 100 kg of the weight employing a variable-geometry rectangular inlet and nozzle. It produces 1.2 kN of thrust at SLS, which corresponds to 1/4 of the ATREX engine. Design of the hypersonic components such as the inlet, precooler and nozzle has been finished and their aerodynamic performances were verified by wind tunnel tests and CFD analyses. A prototype model of the diagonal-flow compressor whose pressure ratio is 6 was manufactured. Its rotating tests under the very-low pressure conditions are now in progress. The reverse-flow annular combustion chamber was successfully tested. The first flight test of the S-engine is to be conducted in 2008 by the Balloon-based Operation Vehicle (BOV) which is about 5 m in length, 0.55 m in diameter and 500 kg in weight. The vehicle is dropped from an altitude of 40 km by a high altitude balloon. After 40-second free-fall, the vehicle pulls up and S-engine operates for 30 seconds at about Mach 2. High altitude tests of the engine components corresponding to the BOVs flight condition have been conducted.