AUTOPLT OF LTT ACR ACFT DISENGAGED ALT HOLD AND DID NOT LEVEL OFF. ALTDEV.

Narrative

ENRTE ON J138 FROM MOB TO IAH WE WERE ENCOUNTERING ICING (LIGHT) AT FL240. WE REQUESTED A CLB TO FL260 TO PUT US IN THE CLR ON TOP. THE AUTOPLT WAS ENGAGED AND I SELECTED 'CLB' MODE AND 26000. I FAILED TO NOTICE THAT THE AUTOPLT ALT HOLD DESELECTED AND INSTEAD OF LEVELING AT FL260 THE ACFT CONTINUED TO CLB. WE CAUGHT THE DEV AT 26100; DISENGAGED THE AUTOPLT AND BEGAN A GENTLE PUSHOVER AND DSCNT BACK TO FL260. ACTUAL DEV WAS APPROX +200 FT. AT THIS TIME; ATC CALLED AND TOLD US HE WAS SHOWING US 300 FT HIGH. A TEST OF OUR MODE C SHOWED OUR TRANSPONDER (#2) TO BE RPTING 200 FT HIGH. TRANSPONDER #1 WAS RPTING THE CORRECT ALT. WE TESTED BOTH TRANSPONDERS AGAIN WITH THE NEXT SECTOR CTLR AND CONFIRMED THIS WAS TRUE. WE TESTED BOTH TRANSPONDERS AGAIN WITH HOUSTON APCH AT 9000 FT AND THE #2 TRANSPONDER WAS RPTING 100 FT HIGH. UPON LNDG AT OUR BASE IN HOUSTON; WE WROTE UP THE #2 TRANSPONDER. THE AUTOPLT ON THE MDT IS NOTORIOUS FOR DESELECTING ALT HOLD WITH NO WARNING. I WAS LOOKING UP THE CRUISE PWR SETTING FOR FL260 AND ONLY OCCASIONALLY GLANCING AT THE ALTIMETER. I REALIZED THE AUTOPLT WASN'T GOING TO CAPTURE THE ALT WHEN I SAW THE ALTIMETER PASS 260 WITH NO CHANGE IN RATE OF CLB. COULD HAVE BEEN WORSE.