My Dutch Star with the ISL and now my Mountain Aire with the ISX both have 'real' Jake brakes with low/medium/high switches. You can barely hear it. I assume they go 2/4/6 cylinders for low/medium/high but never looked into it much. I do know that they work really, really, REALLY well.
You are correct about the "2" meaning the Allison is being told to go to 2nd, when RPMs allow it. That way it'll downshift as aggressively as possible when the Jake brake is on, bringing the coach's speed down as quickly as possible. I don't think I'd want to change it to 4th...
-TJ