This problem is likely the result of an altitude loop.
Step 1 -
Determine what kind of encoder is feeding altitude information to the AXP340. It can be either RS-232 or Gray Code. If it is Gray Code, we do not expect an altitude loop problem to be possible, and there is likely something else wrong with the aircraft; encoder; or the transponder itself. If the encoder is sending RS-232 to the transponder, continue to step 2.
Step 2 -
Determine where the AXP340 is sending it's altitude information out to. The AXP340 is designed to output (or "repeat") it's received altitude via an RS-232 output on the main connector Pin 6. You need to determine where this output is going.
If it is going to the IFD540/440, continue to step 3.
If this output is going to the MLB100/Skytrax100, skip step 3 and continue to step 4.
Step 3 -
Put the IFD into configuration mode, and find the RS-232 input currently configured to "Icarus Alt". We will need to turn this input off on the IFD. This should correct the problem.
Step 4 -
Put the IFD into configuration mode, and find the ARINC429 input currently set to "Traffic Advisory". This input will need to be changed to "MLB100 Traffic". This should correct the problem.