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Cisco Systems, the San Jose Internet backbone company digging deep into its pockets to acquire Web-related companies, has agreed to acquire Reactivity for $135 million. The purchase will allow Cisco to integrate its networking operations more closely with Web applications.

Reactivity provides so-called XML gateway technology, which is placed in a layer of the Internet network that talks with Web applications. Reactivity has built things like XML firewalls, but will also help wireless and other carriers as they roll out more Web services with interactive features for consumers. Indeed, Cisco says the rise of Web 2.0 like companies was a driver behind the acquisition:

….customers are deploying a variety of Web 2.0 capabilities that are collectively transforming the World Wide Web from a collection of relatively static web sites to a services rich computing platform. XML- and Simple Object Access Protocol (SOAP)-based web services are becoming the de facto communications and information exchange standard for this new model of applications. Reactivity’s industry leading XML gateways enable customers to efficiently deploy, secure, and accelerate XML and web services.

The pace of Cisco acquisitions remains robust. Already this year, it has bought Five Across (for a reported $25-$30M) and Ironport Systems. And these follow Cisco’s considerable efforts to move into your living room, with acquisitions of companies like wireless router company Linksys and set-top maker, Scientific-Atlanta. Now you know why Cisco’s Ned Hooper has crept onto the Midas List.

Finally, a note on the investors who win on this deal. Venture Capitalists invested about $51 million $31 million (we’re told some capital had been given back) into Reactivity since 2000, so the deal probably meant a decent profit for most of them. Again, venture firm Accel Partners showed its staying power, backing Reactivity during 2000, at a relatively high valuation (we’re told about $52 million), and then staying with it even after the Internet bubble burst and Reactivity’s value was slashed to $14 million. It’s good to have backers who stay the course. Other investors were Austin Ventures and Diamondhead.

San Jose’s Cisco has invested $50 million in China Communications Services (CCS), a new spin-off from China’s state-run telecom company.

CCS offers all kinds of telecom services to Chinese companies and service providers, including — surprise — digital video.

Cisco, the giant networking company, has been aggressively entering new markets, and video is one part of its strategies. Cisco is not content to settle for taking over the U.S. living-room. It sees many more living-rooms in China.

The investment in the China Telecom spin-off is Cisco’s largest investment in China to date. The move is also significant because spin-offs from Chinese government-run companies are happening at a rapid rate, and they need help getting cutting edge technology. Cisco, which is partnering with CCS, can stand to see strong growth as CCS becomes more efficient.

CCS had its IPO on Friday on the Hong Kong exchange, and the Cisco investment was part of the IPO. Other CSS shareholders include China Telecom Group, China Mobile and China Unicom.

Cisco has already returned a profit on its first $400M batch of venture investments in China beginning in 2001, Ned Hooper, Cisco VP of Corporate Business Development, told VentureBeat earlier this week. Cisco has since started investing from a second batch of funds, and its too early too tell how these investments are doing. All told, Cisco has invested more than $700 million into nearly 30 Chinese start-ups, including online learning company Ambow and gaming company Shanda.

Hooper said the CCS investment is to help spark the next wave of service provider infrastructure investment in China, which is being led by 3G (third generation telephone networks) and broadband services, including Internet TV.