FLC OF A B767-200 OVERSHOT CLB ALT DUE TO FORGETTING TO RESET ALTIMETERS PASSING THROUGH FL180. A TCASII ALERT OF AN ACFT 600 FT ABOVE THEIR ASSIGNED ALT; WHICH ATC ADVISED WAS 1000 FT; CAUSED THE CAPT TO RECHK THEIR ALTIMETER SETTINGS AND FIND THEIR ERROR. THE FLYING FO IMMEDIATELY DSNDED TO ASSIGNED ALT.

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ACFT WAS LEVEL AT 17000 FT. ANOTHER ACFT WAS S OF OUR POS BY 3-5 MI; PARALLELING OUR COURSE AND AT THE SAME ALT. OUR ACFT WAS EXPERIENCING MODERATE CHOP. AT APPROX AB40 LCL TIME; OUR FLT WAS CLRED TO CLB TO FL190. THE PF INITIATED THE CLB VIA SELECTION OF VNAV. AT APPROX 17600 FT; WE RECEIVED A TFC ALERT FROM THE ACFT'S TCASII SYS. THE INTRUDING ACFT (PERCEIVED) OR POTENTIALLY CONFLICTING ACFT WAS DISPLAYED ON BOTH L AND R EHSI'S WHICH WERE IN MAP MODE. THE ALT OF THE OTHER ACFT WAS DISPLAYED AS FL196. WE BEGAN ACTIVELY SEARCHING FOR THE ACFT WHICH WAS AT 12 O'CLOCK AND 3-5 MI. I ADVISED ATC IMMEDIATELY OF THE TFC ALERT. OUR INITIAL RATE OF CLB WAS A LITTLE OVER 2000 FPM. ATC RESPONDED THAT TARGET ACFT WAS AT FL200. OUR DISPLAY CONTINUED TO DISPLAY FL196. FO SLOWED THE RATE OF CLB AND WE CONTINUED TO SCAN FOR TFC. AS WE APCHED LEVELOFF AT FL190; I OBSERVED THAT THE ALTIMETERS HAD NOT BEEN RESET TO 29.92 AND IMMEDIATELY CALLED 'ALTIMETER SETTING.' BOTH PLTS CHANGED ALTIMETERS FROM 29.53 TO 29.92. AS I DIALED IN THE CORRECT SETTING; I BECAME AWARE THAT THE EVENTUAL ALT WOULD EXCEED FL190; AND BEGAN PUSHING THE CTL FORWARD AND ADVISED THE FO TO DSND IMMEDIATELY. MAX ALT OBSERVED ON FO'S ALTIMETER WAS 19280 FT. MAX ALT OBSERVED ON CAPT'S ALTIMETER WS 19320 FT. DEV WAS MOMENTARY IN DURATION. CAUSAL FACTOR: FLC FAILED TO SET CORRECT ALTIMETER SETTING FOR AIRSPACE. CONTRIBUTING FACTORS: TASK MGMNT; DISTR FROM TASK BY TFC ALERT; FAILURE OF CREW TO UNDERSTAND TCASII DISPLAY IS DEPENDENT UPON ALTIMETER SETTINGS IN USE. COMBINATION OF TFC; ALTIMETER CHANGE; HIGH INITIAL RATE OF CLB (SET OFF ALERT) COMBINED TO CREATE A HUMAN ERROR. PROBABILITY OF SIMILAR EVENT OCCURRING TO SUBJECT CREW APCHING NIL.