Generally speaking, IS 2 seems to be the most responsive for me on an EP1. however, definitely make sure that you turn it off when it's on a tripod if you want tack sharp shots.
If there's no movement, some IS implementations will actually start to look for, and thus overcompensate for and create, vibration, this can add unwanted smudginess to your images.
If there is one thing that annoys me about Olys it's their confusing IS implementation. Other than that I couldn't be happier.
Finally returning to this thread, after shooting overseas for two weeks with the E-PL1 and both the kit zoom and two manual legacy lenses...
I'm sort of agnostic so far about the IBIS. It definitely works well on shutter speeds slower than about 1/30s, on the kit lens and a fixed 45mm (90mm effective). In fact, the (apparently normal) noise the IBIS makes is more clear the longer the shutter is open. It is very sensitive to the manual setting of focal length with legacy lenses. If you forget to set that correctly, you're hosed.
But I can't say I see consistently good results when IS is on using anything from 1/30s to 1/125s. It becomes moot beyond 1/250s. I'll try using IS2 and see what transpires. You can definitely see the telltale marks of the IBIS system in certain photos. For example, water spilling off a fall. When you zoom into trails of lit droplets falling, you can see a little wiggle echoed from droplet to droplet.
Also, it seems that if you want sequential shooting, try leaving IS off. It looks like the rapid firing and transfer of momentum of the shutter to the body perhaps fools the IS into doing compensations that don't end up looking sharp.
I don't believe the unit is defective. There is no defect I can consistently reproduce. Perhaps no IS scheme is 100% effective, under normal use. As I say, it works well when the shutter is slow. It would be nice if there were a setting to automatically turn it off above a selected shutter speed. And yes, if you leave IBIS on while on a tripod or stationary, it will degrade your shot.
I'm frustrated with the range between 1/30s and 1/125s. Sometimes it seems to be worse than without IS, sometimes not. It reminds me of what Imaging Resource found with the EP1 in its initial tests.
Nevertheless it produces amazing shots, especially with legacy Contax G rangefinder glass.