ComputerWorld: "Web 2.0 tools could significantly improve state and local government communications with constituents, as well as aid in recruiting top college graduates for IT positions, according to speakers and users at the Pennsylvania Digital Government Summit here last week.
However, speakers also warned that local and state government officials would have to move slowly, since they face perpetual IT funding and manpower constraints."
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Web 2.0 in the Old Dominion
Not exactly a poster boy for Web 2.0, but looks like they are a bit more into it than Pennsylvania!
http://virginia.gov/cmsportal3/
How about Alabama?
I just read another success story in the Federal Computer Week, "Alabama puts mashups to work". Although Alabama's site is geared toward the enterprise level it has the same principle of using Web 2.0 in government.