JDM von Weinberg , Feb 28, 2009; 06:17 p.m.
My guess is that if you reset the camera to its original default settings your problems might go away. It sounds like you've got something wrong in the settings. Do the actual pictures show these effects or is it just on the lcd on the back? Your example just seems to be out of focus and moved during the exposure.
In any case, after two months the thing is still under warranty. try again if resetting it doesn't do the job.
Of course, you hope that your camera always "digitizes" - what you are describing is often called pixelation , sometimes done on purpose to avoid showing some part of a picture.
What you describe for the IS is what it is supposed to do: eliminate motion at your end of the camera.