"Web 2.0" is one of those overhyped terms that started as a vacuous concept yet the popularity it has gained over last one year makes it a useful term that marks a milestone in the evolution of the Internet/web.
Tim OReilly, orignator and chief evangelist of Web 2.0, tries to articulate the principles governing Web 2.0 as being
1. Web as Platform: Web Services, Mashup sites, software-as-service
2. Long tail Business Model: Instead to targeting the few big fish, build for millions of small ones
3. Harnessing Colletive Intelligence: Network effects, folksonomy, wisdom of crowds
4. Ease of building mashup websites make data and content ownership critical to maintaining competitive advantage
5. Software products morph into software services
6. Ajax: Asynchronous data retrieval
There is an interesting discussion on the definition of Web 2.0 here
To me the key insight in following the trends that constitute Web 2.0 is that it is not about "cool, bleeding edge" technologies rather every successful example of Web 2.0 implementation/example provides its user the ability to create his/her own experience as an individual or as part of a community.
Google redefined "relevance" of search results from being output of "sophisticated computer algorithms to collective judgement of human web authors
Amazon allows users to create unique experiences for themselves
Ebay is a community co-created example of online marketplace as opposed to uninspired B2C websites
myspace.com, Wikipedia, Flickr, BitTorrent, Napster, blogs etc. each is an example that allows users to create unique experiences for themselves
In my opinion ability to co-create should be the central insight of Web 2.0, while principles put forth by Tim above only contribute to realizing this central concept of co-creating experiences
The book that put forth this idea of Co-creation is : The Future of Competition: Co-creating unique value with Customers by C. K. Prahalad, Venkat Ramaswamy