John,
You sound as confused as I was when I was trying to figure out how i was suppose to setup the governor. It took some time and patience from the guys here on the forum to talk me though it (a belated thanks!).
Anyway here is the way to look at it. First lets look at normal governor mode:
In "normal" mode, the ESC is looking at the pulse coming out of the timer/throttle (the Ztron in your case). The timer puts out a 1-2ms pulse at a 50Hz rate. A 1ms pulse is interpreted as throttle "off", and a 2ms pulse is throttle "full on" =wide open throttle or WOT. So lets say you set your Ztron dip switch for a "25" setting---which I think is right in the middle of the throttle range. Then the Ztron would put out a 1.5ms pulse. This is nominally equivalent to the throttle channel output on a RC receiver.
ok, so far, so good. Now the trick is how the ESC interprets this signal. What it does is map the Ztron output into a rpm range. Now you should know, the ESC doesn't really measure rpm directly, but it is counting the signal that the permanent magnets make as they spin around the stator. A typical motor that we are using has 14 magnets. I think Dean Pappas once gave us the conversion between the Ztron pulse output and the rpm level. Anyway the Ztron output maps onto a rpm and it is a little trial and error to figure it out. When I use to use this mode, I would replace the normal propeller with a small 2"diameter disc that had alternating dark and light quadrants. My tach could read the rpm of the motor this way, without worrying about a dangerous 9000 rpm prop whurling around. By playing with the timer, I could map out the rpm as a function of the timer setting. A little tedious, but it worked.
If you are still with me, once the throttle setting is made, the governor will try and keep that rpm setting, as long as the throttle setting stays the same. So if the load goes up (like in a climb) the ESC governor will increase power to the motor, and take it away as the load goes down. As a result the rpm stays constant. The only limitation is that the rpm itself must be attainable by your particular motor and battery. That typically means that we fly our level laps at ~75% throttle. If the power needs go up, the ESC can draw on that remaining 25% to increase the throttle. Now it isn't completely clear what 75% actually means to everyone--to me it means that the ESC is outputting a PWM pulse that is on 75% or the time and off 25%. That actually translates into less than 75 % power (I think).
There is a small wrinkle called "high" and "low" governor mode--and that is because you may want a higher target rpm range than what is considered "normal" (normal was defined for helicopter pilots).
The advantage of the above type of governor mode is that if one day you think you need a little bit more "oompf", then simply increase the Ztrin throttle setting a click or two higher, and the rpm will increase some too. Last I recall each click is in the 100 rpm range--but I forget because...
I use the set rpm mode. I was tired of the back and forth setting stuff, and knew where I wanted to fly. In Set RPM mode you can set 3 target rpms. The first value is for timer throttle settings above 0 and less than 50%, the second above 50% and below 99%, and the 3rd is for 100% throttle. I set the first value to be 7500 rpm, the second to be 7950 rpm, and the third also to be 7950 rpm. I then use my timer so that when I take off, the throttle value is ~45%. This gives me 7500 rpm for a nice calm takeoff. I then set the timer to ramp the throttle from the 45% value up to 100%. Now this took a few trials and errors, but right now, my timer passes the 50% point about 1.5 laps before the wingover--so when the ESC sees the 50% value, it ramps the rpm to 7950, and holds it there the rest of the flight.
But the disadvantage, at least the way I am using it with the reduced takeoff power, is that I am locked into a flying rpm, and can't change it unless I bring a laptop to the field. If I didn't care about the takeoff power, I could set a windy weather rpm and a calm day rpm, and then just adjust the timer to one of the desired rpms. Or if I had 3 timers already setup, I could just change timers.
Well this was another long winded post. I hope it isn't confusing you.