Here is my take on this:
When in normal constant voltage mode, a sample of the control voltage is combined with the output voltage coming from the collector of the bypass transistor. This is applied to the inverting input of the op-amp. When not in current limit, this voltage will be lower than the non-inverting input pin. This will cause the output of the op-amp to be more positive and to reverse bias the LED so it has no control over the LM350's adjustment pin.
When more current is drawn the output voltage of the transistor will have to increase accordingly. This will result in the voltage at the inverting pin to go more positive at some stage than the non-inverting pin, thus forcing the output of the op-amp in the negative direction. This will bias the LED on and pull down the LM350's control pin to fold back until no over-current condition exists. The points at which the current limit acts are determined by the ratio of R2 and R5, which can be varied with R2.
mtwieg - I think we are basically saying the same thing. I only saw your post after posting.