So here is what i think is an interesting question:

If i am in a valley and fly to a height of 400' we can all agree that i am 400' above the ground.

What happens if I take off from a ridge that is 800' above the valley, at the edge of the valley, fly to an altitude of 400' and then fly out over the valley. Is my altitude then 1200'  Will the P3P compensate and lower the unit to 400' over what I am actually flying over?

Its altitude above ground level of the home point. In the scenario it would show 400' and nothing would happen..

That is what I figured the case would be. Thanks.

Thanks for the information. This was exactly the answer I was looking for. I did not want to fly off of the edge of a cliff and have the bird drop to the designated AGL.

Just to be sure the altitude limit is from the takeoff point and not the actual AGL where it currently is?

Marc