FLC OF DC9 IS CLRED TO CLB AND THEN HAS TCASII TA; THEN RA TO DSND. THEY SIGHT THE OTHER ACFT AT SAME ALT AND FOLLOW THE TCASII. ATC SAYS THE B727 IS AT 8000 FT; BUT FLC AND TCASII INDICATE SAME ALT; 7000 FT.

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WHEN ON A HDG OF 340 DEGS; CLRED TO CLB TO AND MAINTAIN 11000 FT; PASSING ABOUT 6000 FT; DEP CTL ASKED US TO 'GIVE ME A GOOD RATE' TO 11000 FT. PASSING ABOUT 6500 FT MSL; WE SAW AND HEARD 'TFC' ON OUR TCASII DISPLAY AT 1 O'CLOCK; AND ABOUT 4 NM INDICATING 500 FT ABOVE US. I RADIOED ATC THAT WE HAD TFC AT 1 O'CLOCK; 3 MI; ALMOST LEVEL ON OUR TCASII. AT ABOUT THAT TIME WE GOT A TCASII RA TO DESCEND. I THEN SAW THE ACFT VISUALLY IN A L-HAND TURN; PASSING A SE HDG LEVEL WITH US AT 7000 FT MSL. AS WE FOLLOWED OUR TCASII RA BY DSNDING AND TURNING L ALSO; I RADIOED ATC THAT WE WERE DSNDING AND TURNING L IN RESPONSE TO A TCASII RA. ATC THEN RADIOED US THAT THAT ACFT WAS A B727 LEVEL AT 8000 FT MSL; AND DIRECTED US TO TURN L TO A HDG OF 160 DEGS AND CONTINUE OUR CLB TO 11000 FT. AFTER STARTING THE ATC DIRECTED L TURN; WHEN 'CLR OF CONFLICT; I RADIOED ATC THAT I BELIEVED THE OTHER ACFT WAS AT 7000 FT. ATC THEN FURTHER DIRECTED US TO CONTINUE THE L TURN TO 340 DEGS AND HANDED US OFF TO ZDC. I TRULY BELIEVE IN THIS CASE THAT THE CTLR LOST SITUATIONAL AWARENESS OF THE OTHER ACFT; FOR WHATEVER THE REASON; AND CLRED US TO CLB TO 11000 FT WHEN HE SHOULDN'T HAVE. PERHAPS FREEING UP MONEY HELD HOSTAGE IN THE AVIATION TRUST FUND TO EQUIP CTLRS WITH STATE-OF-THE-ART EQUIP WOULD RECTIFY THIS AND MANY OTHER SIMILAR OCCURRENCES.