Safetypee and all,
It is my understanding that altitude transmitted by Mode C is pressure altitude at 29.92, and is not affected by aircraft altimeter setting. Barometric correction for ATC is applied through their equipment. Small aircraft can have “blind” altitude reporting equipment to meet the mandates (no interaction with other aircraft equipment other than transponder).
On the subject of altitude, I am aware of one carriers use of GPS altitude as a crosscheck for altitude inputs on their EGPWS. This after a couple of escape maneuvers triggered by RA “hits” during moderate rain (radar altimeter read rain as terrain). This concept could be applied to other uses (e.g. VNAV crosscheck), but I have not heard or read of such use.
GPS altitude:
http://gpsinformation.net/main/altitude.htm