An altitude encoder is always pressure altitude (1013 mB). So is the altitude transmitted by the Transponder.
Portable systems indeed read out the pressure altitude transmitted by their own transponder.
So the difference is altitude is pressure altitude of your aircraft compared to the pressure altitude of the other aircraft. No conversion needed.
A reason why manufacturers like power flarm aren’t interested in azimuth is likely because of the very critical installation / timing if you want anywhere near an acurate measurement of let’s say 15 degrees. On simple installations the accuracy is extremely poor. On TAS / GTS installations coax cable length is very critical, not everbody seems to understand this, I have seen quite some incorrect installations. For the best installation it is a good idea to measure the electrical length of the coax cable, as these should be very exact. Incorrect length means incorrect azimuth measurement.
it does rely on the aircraft’s own transponder radiating the correct pressure altitude in the first place.
A fair assumption, no? That’s why all regimes have regular transponder checks, a lot depends on this altitude being correct.
It doesn’t need to correct for that,
The installed systems correct for it by getting the Gray code or ARINC429 pressure altitude from the aircraft systems. Mine gets it from the KEA130A encoding altimeter. A Garmin TAS would probably get it via ARINC429 from a GTX330 which in turn gets it from an encoding altimeter or whatever. The TAS605 can’t get it from the GTX330 direct because Garmin’s ARINC429 altitude is not the same as Avidyne’s ARINC429 altitude 
The portable systems need to contain an altitude encoder or (as in the case of the Zaon products AFAIK) they receive the emissions from the aircraft’s own transponder and extract the pressure altitude out of the data packet, which is quite neat but it does rely on the aircraft’s own transponder radiating the correct pressure altitude in the first place.
The transponder does indeed radiate the pressure altitude (altitude with a QNH of 1013) but any system displaying traffic relatively to you ought to be correcting it for that.
It doesn’t need to correct for that, as both you and the “target” both use QNH 1013.
for all PowerFLARM owners I can recommend the interior flarm antenna for 39,90€ – I was able to find a place to mount it vertically (on the side wall of the TB20 center radio stack on the glareshield) – the PF now shows the targets earlier (mostly flarm equipped gliders) – ADS-B and Xponder traffic depiction works well with the already built-in antenna on the PF as the signal strength is stronger.
I’ve had quite good success with the Zaon XRX showing position. It is mounted on the glare shield and wired to a Garmin Aera 550. In the front 270 deg it pretty accurately depicts traffic.
I presume the PowerFlarm Mode C circles expand and contract depending on the range? If so I can see that that is quite useful to determining proximity and as you say, altering altitude will avoid a conflict.
I guess the portable systems can’t do that – unless they have a barometer (in which case you have the problem of the cabin altitude being anything up to 200ft different from the outside)
PowerFLARM has its own barometer and I have observed the cabin pressure effect to be rather small. Level aircraft appear as level in my tests. Probably the same effect as pulling the alternate static air switch and watching your altimeter. I can see the needle jump but hardly a difference of more than 20ft.
Before I spent the 12k I too thought that TAS systems were a waste of money, especially in the circuit Now I am completely converted.
Until you can see the red in the eyes of a glider pilot 
I might have bought a TAS, too but flying without FLARM is something I wouldn’t do anymore. Too many of them, too hard to see.
The transponder does indeed radiate the pressure altitude (altitude with a QNH of 1013) but any system displaying traffic relatively to you ought to be correcting it for that.
I guess the portable systems can’t do that – unless they have a barometer (in which case you have the problem of the cabin altitude being anything up to 200ft different from the outside) or you set the QNH (whose QNH…?).
Even the highly sophisticated TCAS work this way; the builders say they are unreliable in azimuth.
I think there is a historical/regulatory component to that i.e. airliners are allowed to change only altitude, to avoid traffic. That is the TCAS II protocol, I believe.
It doesn’t mean that the azimuth is actually wrong. It can be, especially for close-in traffic (under say half a mile) but usually it is spot on unless the installation is bodged. If you do avoid based on the azimuth, you have probably a 90-95% change of improving the separation even if you stayed at the same level. So it’s worth doing, IMHO.
Before I spent the 12k I too thought that TAS systems were a waste of money, especially in the circuit Now I am completely converted. The chief difficulty, in the UK for sure, is finding an avionics installer capable of doing it without completely bodging it and stripping half the screws in your plane…
I climb or descend +/- 300ft to reestablish some more vertical separation hoping the other aircraft has the proper altimeter setting
Transponder altitude is flight level so you only have to hope that the last static test was done by somebody competent I do it exactly as you described and this is why I think PowerFLARM is sufficient and the benefits of an expensive TAS are limited.
When my PowerFlarm shows a mode a/c target without azimuth nearby, let’s say with a delta altitude of 200ft and I don’t see the traffic, then I climb or descend +/- 300ft to
reestablish some more vertical separation hoping the other aircraft has the proper altimeter setting
Collision avoidance can only be done on the vertical scale. Even the highly sophisticated TCAS work this way; the builders say they are unreliable in azimuth.
