A B737-3400 FLC FORGETS TO SET THEIR ALTIMETER TO 29 PT 92 ON CLB TO FL220. THEY INCUR A POTENTIAL CONFLICT WITH A XING DC8 AT FL230. THEIR ACFT WAS AT FL224. PIC CITES FLC DISTR DUE TO HDG; ALT CHANGES AND TA'S ON CLBOUT.

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AFTER TKOF ON OUR WAY TO HPN; WE WERE CLRED TO FL220. AFTER WE HAD LEVELED OFF; WE SAW A DC8 ON OUR L AT FL230. A FEW SECONDS LATER; OUR TCASII WENT OFF AND ATC ASKED US TO VERIFY THAT WE WERE LEVEL AT FL220. WE CONFIRMED THIS AND AT THE SAME TIME WE NOTICED THAT WE HAD NEVER SET OUR 3 ALTIMETERS TO 29.92 INCHES. THEY WERE STILL AT 29.53 INCHES WHICH WAS ORD'S CURRENT SETTING. WHEN WE RESET THE ALTIMETERS; WE WERE REALLY AT FL224. NO ACTION WAS TAKEN (NEEDED) TO AVOID THE DC8. THIS INCIDENT PROVES THAT YOU ALWAYS HAVE TO STAY VIGILANT. WE HAD BEEN GIVEN QUITE A FEW HDG AND ALT CHANGES AS WELL AS TA'S WHICH HAD DIVERTED OUR ATTN. ALSO; I HAVE FLOWN WITH THIS FO ON MANY OCCASIONS AND HAD ALWAYS BEEN IMPRESSED WITH HIS FLYING ABILITY WHICH PROBABLY HAD MADE ME MORE RELAXED THAN I SHOULD HAVE BEEN. SUPPLEMENTAL INFO FROM ACN 391067: CLBING OUT OF ORD FOR HPN; BOTH THE CAPT AND I INADVERTENTLY FORGOT TO RESET THE ALTIMETERS TO 29.92 AFTER PASSING FL180. ATC REQUESTED THAT WE LEVEL OFF AT FL220 FOR XING TFC. ATC THEN CALLED OUT THE TFC; A DC8; AT FL230; SEBOUND; AT OUR 10:30 TO 11 O'CLOCK POS. WE SAW THE TFC VISUALLY AND NOTED OUR ALT AS WE APCHED FL220. WE ADVISED ATC THAT WE HAD A VISUAL ON THE TFC. AS WE APCHED LEVELOFF; WE RECEIVED A TCASII TA. ONCE AGAIN; WE VERIFIED THE ACFT APCHING OUR LEVELOFF ALT OF FL220. WE THEN RECEIVED AN RA FROM OUR TCASII ADVISING US TO 'REDUCE CLB.' THE AUTOPLT WAS ALREADY LEVELING THE ACFT AND WAS ACTUALLY COMPLYING WITH THE FLT PATH GUIDANCE BARS AS IT LEVELED OFF. THE DC8 PASSED WELL OFF OUR R SIDE AS WE LEVELED AT FL220. ATC THEN REPLIED THAT WE WERE SHOWING FL224; AND TO PLEASE CHK OUR EQUIP. WE ACKNOWLEDGED AND NOTHING FURTHER WAS SAID BY ATC; OTHER THAN TO ISSUE US A CLB TO OUR PLANNED FLT LEVEL. NEEDLESS TO SAY; VIGILANCE MUST BE MAINTAINED THROUGHOUT ALL PHASES OF FLT. BOTH THE CAPT AND I WERE COMPLACENT IN OUR ACTIONS AND THAT RESULTED IN A VIOLATION OF ASSIGNED ALT AND A POTENTIAL CONFLICT WITH ANOTHER ACFT.