I recently stumbled across the best definition of it that I've read:
"Exploiting the huge potential of the Information Age is a task set before all of us. Being able to access information at the time and place where it is required is more possible than ever before, with the advent of wireless technologies, broadband connectivity and intelligent agents. Digital literacy is the means through which this can be accomplished...
In short, digital literacy is all about making the technology work for you, finding new and interesting ways in which information technology can enhance life and improve the quality of teaching and learning. The digitally literate teacher will be convinced of the efficacy and usefulness of the connected computer."
Transforming Primary ICT, edited by Steve Wheeler 2005