Remember there's a difference between wordpress.com and wordpress.org
You install the download from wordpress.org onto your site, you make a free web2.0 at wordpress.com
From wordpress.org you get yourwordpressblog.com (this is money site or a blog that you will direct to your money site)
At wordpress.com you get yourwordpressblog.wordpress.com (this is web 2.0)
2.0 properties are (usually) free blogs you make on different platforms like Rext described and link them together and to the site where you make your money. Because they're on different platforms and sites, the linking will look a lot more natural than if you had 5 sites on one server linking between one another.
In regards to your original post, it's totally ok to have multiple sites on the same server, and you can even link one to the other...If they aren't discussing the same topic and if you aren't trying to make it seem as though they're separate entities. If you want your blogs to be in the same market
and connect to each other, your best bet is to host on separate servers.
Edit: removed link...
1. Set up many more than 5 web 2.0 and set them up on different blog platforms.
2. Yes yes
3. Bookmark your articles
4.