Limit Document Versioning Issue

Hi,

I have a document library with versioning enabled to allow for major and minor versions. I have also enabled the Optionally limit the number of versions to retain to version 3 for both major and minor.  I presume here that if I hit the version limit I should not be able to see previous versions i.e. if I have a document with major version 4 and minor version 3 I should not be able to see version 1.0. if this is not correct, please correct me. I have a library which is completely ignoring the limits on versions.  

any help would be appreciated.

thanks,

nish