Mode 1 is the standard two axis operation (pitch and yaw) in which the camera attempts to correct any movement it detects. This is the standard mode intended for stationary subjects.
Mode 2 is intended especially for panning. It is designed to ignore motion in the direction of the panning, but to correct any detected motion at right angles to the panning direction.
Mode 3 is for photographers who don’t want the viewfinder image to be affected by IS. In this mode, stabilisation is applied only during the actual exposure.
Some recent IS lenses dispense with a mode switch altog