A BE400 autopilot pitched up and the aircraft gained 400 FT before the crew could disconnect it and return to the assigned altitude on an ILS approach.

Narrative

Captain - Captain pairing. I was pilot in command and pilot monitoring. We got along great and worked well together. Ferry flight to TEB. We were being vectored to the ILS 6 at TEB. Autopilot was engaged in heading mode. We were at 2;000 FT and had just started a descent to 1;500 (per ATC clearance). We had auto-switched to green needles and were waiting to intercept the localizer. We were well below the glideslope; which would be normal for our position and altitude. At about the same time the localizer was being captured (exiting HDG mode) the airplane made an abrupt pitch up. I believe the flight director was pitching up to capture the glideslope; even though it should not do this. By the time we identified what was happening and the pilot flying disconnected autopilot we had climbed to nearly 2;500 MSL (about 500 FT higher than we should have been). He quickly returned the aircraft to the proper flight path and we were at 1;500 FT well before DANDY. The Controller noted the climb. I acknowledged and said that we had a brief; unexpected autopilot issue. We finished the approach and landing without incident. After shutdown I had a discussion with Maintenance and our Assistant Chief Pilot and MEL'd the flight director on the right side. I'm not sure how you avoid this. In this type of incident the more appropriate question is 'what could we have done to identify and correct the problem more quickly?' This would not have happened if the autopilot was disengaged; i.e. hand flying. But that brings up other risks that likely outweigh the gains. Closer monitoring would help too; but in VFR conditions we had our eyes outside and inside. I don't think either of us were complacent. Ideally; we should have identified and corrected more quickly.