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.
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.
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.
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.
