If you play a C major scale with the above stated settings, the harmony note created by the HD500 would be a major third for C, F, and G, and a minor third for D, E, A, and B. When you chose the key of C with the setting of  a 3rd, you are asking the unit to provide a harmony note that is a third and in a C major scale. I am posting a complete list for you. The black letter is the note you play and the red letter is the note that the smart harmony effect creates as follows: 
  
C E 
D F E G F A G B  A C B D