From the great GM SI online books:

Operation
Supercharger boost pressure is regulated to prevent engine and drive train damage. When the engine is operating under high boost conditions, the powertrain control module (PCM) limits boost pressure to 8 psi. The PCM disables boost under the following conditions:

When reverse gear is selected
When the vehicle is decelerating
When the engine coolant temperature is excessively high
When drivetrain abuse is detected

The PCM controls boost pressure by using the boost control solenoid. The boost control solenoid is normally an open valve. Under most conditions, the PCM commands the boost control solenoid to operate at a 100 percent duty cycle. This keeps the solenoid valve closed and allows only inlet vacuum to control the position of the bypass valve. At idle, engine vacuum is applied to the upper side of the bypass valve actuator, counteracting spring tension to hold the bypass valve open. As engine load is increased, engine vacuum is decreased, causing the spring in the bypass valve actuator to overcome the applied vacuum, closing the bypass valve and allowing the boost pressure to increase. When reduced boost pressure is desired, the PCM commands the boost control solenoid to operate at a 0 percent duty cycle. This opens the solenoid valve and allows boost pressure to enter the bypass valve actuator at the lower side to counteract the spring tension, opening the bypass valve and recirculating excess boost pressure back into the supercharger inlet.

Results of Incorrect Operation
An open boost control solenoid control circuit, an open ignition 1 circuit, or boost control solenoid valve stuck open will cause reduced engine power, especially during wide open throttle operation.

The boost control solenoid control circuit shorted to ground, boost control solenoid valve stuck closed or a restriction in the boost source or signal hoses will cause full boost to be commanded at all times and a possible overboost condition during high engine load situations.

A restriction in the vacuum signal hose to the bypass valve actuator or a stuck closed bypass valve will cause a rough idle and reduced fuel economy.

SO DOES THIS MEAN..US WITH REDUCED SIZE PULLEYS NEED TO CLOSE OUR BY-PASS VALVES?? TO BENEFIT FROM THE OVERBOOST EFFECT??

Whereabouts does the excessive boost air exit out to the environment ?

I posted last week that after I put on a 2.25 pulley, my boost drops to about 8 when I shift into third on a hard accelleration run. Might this overboost protection be why?

The PCM is getting an abuse alert, so it drops the boost off to 8PSI. It'* similar to a blow off valve on a turbo. On these cars the overboost is dumped into the inlet and recirculated after a quick decompression. I'll upload the pic of how it works tomorrow.

How would I test the valve for proper operation? And where exactly is it located on the engine?

Yes This is also happening to me but at about 90 mph on a full throttle run. A very noticeable drop in torque. The boost gauge reads 10 psi the whole time but I can definitely feel the sudden reduction in power. It doesn't happen all the time.

Sounds like an easy mod to make but it also sounds dangerous.
I'm sure GM engineers put in the device as a protection for a good reason.

I sure am glad I still have my Firebird. Simple 4 barrel Q-Jet and MSD electronic ignition with no computer and 400 cubes. Consisently goes like stink.

The only real way of changing the limiter is a reprogrammed PCM. ASE and DHP both reset this to 22lbs. The engine can handle about 27lbs, but don't go near that without hardening the guts. This reprogramming will also remove the speed limiter and to 4000 RPM rev limiter, so be careful.

The valve is controlled by the PCM. If there is a problem, a code will be set, but it will not give you an SES light. Scan for codes if you think there is a problem.