What is the functionality of setSoTimeout and how it works?

Does it mean that I'm blocking reading any input from the Server/Client for this socket for 2000 millisecond and after this time the socket is ready to read data?

No, it means that if no data arrives within 2000ms a SocketTimeoutException will be thrown.

What does it mean timeout expire?

It means the 2000ms (in your case) elapses without any data arriving.

What is the option which must be enabled prior to blocking operation?

There isn't one that 'must be' enabled. If you mean 'may be enabled', this is one of them.

Infinite Timeout means that the socket doesn't read anymore?

What a strange suggestion. It means that if no data ever arrives you will block in the read forever.

The JavaDoc explains it very well:

With this option set to a non-zero timeout, a read() call on the InputStream associated with this Socket will block for only this amount of time. If the timeout expires, a java.net.SocketTimeoutException is raised, though the Socket is still valid. The option must be enabled prior to entering the blocking operation to have effect. The timeout must be > 0. A timeout of zero is interpreted as an infinite timeout.

SO_TIMEOUT is the timeout that a read() call will block. If the timeout is reached, a java.net.SocketTimeoutException will be thrown. If you want to block forever put this option to zero (the default value), then the read() call will block until at least 1 byte could be read.

This example made everything clear for me:
As you can see setSoTimeout prevent the program to hang! It wait for SO_TIMEOUT time! if it does not get any signal it throw exception! It means that time expired!

import java.io.IOException;
import java.net.ServerSocket;
import java.net.Socket;
import java.net.SocketTimeoutException;

public class SocketTest extends Thread {
  private ServerSocket serverSocket;

  public SocketTest() throws IOException {
    serverSocket = new ServerSocket(8008);
    serverSocket.setSoTimeout(10000);
  }

  public void run() {
    while (true) {
      try {
        System.out.println("Waiting for client on port " + serverSocket.getLocalPort() + "...");
        Socket client = serverSocket.accept();

        System.out.println("Just connected to " + client.getRemoteSocketAddress());
        client.close();
      } catch (SocketTimeoutException s) {
        System.out.println("Socket timed out!");
        break;
      } catch (IOException e) {
        e.printStackTrace();
        break;
      }
    }
  }

  public static void main(String[] args) {
    try {
      Thread t = new SocketTest();
      t.start();
    } catch (IOException e) {
      e.printStackTrace();
    }
  }
}