The torque setting dial is a clutch that stops the drill when a given torque is hit. And it happens before the "1/2" gearing selector, so torque 1.5 is different in setting 1 than setting 2. How's that for confusing?
But I think that's the way to think of it, if you drive a stick: the 1/2 selector is a transmission, the torque dial is a clutch.
Generally, if I'm drilling holes I set the torque dial all the way to the right and the selector to 2, if I'm driving screws I set the selector to 1 and the torque dial appropriate to the material and screw.