According to Panasonic, here is the description of what each I.S. option is for used for:

• OFF – Turns off the camera’s built in image stabilization
• Mode 1 – Activates pure 2-axis optical lens stabilization optimized for a fixed, static frame. It is best used to smooth out high-frequency vibration (such as heavy equipment vibrating nearby)
• Mode 2 – Activates optical lens stabilization but optimized for intentional camera tracking. It prevents the lens from fighting or snapping back against an operator when manually panning and tilting the camera.
• Mode 3 – Combines physical optical stabilization with digital electronic roll-direction correction (EIS). This is the most aggressive mode for static shots, eliminating horizontal/vertical shaking and rotational twisting caused by violent wind shear.
• Mode 4 – Combines OIS and roll-direction EIS but adjusts the behavior to allow for natural, smooth video movement while minimizing background vibration while the camera is actively panning or tilting.

We’ve had some reports that while a camera is set to Mode 3 or Mode 4 that some “stair step” movements could be detected when zooming.

And just for additional information, here is the description of what the D.I.S.S. options are:

• ON – Allows the pan/tilt mechanism to detect slow, large-amplitude sways and rotates the motors in the exact opposite direction to neutralize the movement.
• OFF – Disables motor-driven stabilization.