A B737 FLC FLY OVER 3 HRS WITH THEIR ALTIMETERS STILL SET TO THE DEP QNH; FLYING ABOUT 200 FT TOO LOW UNTIL A POTENTIAL CONFLICT MAKES THEM AWARE OF THEIR PROB NEAR CLL; TX.

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ON SCHEDULED FLT FROM SEA TO IAH; ABOUT 1 HR INTO CRUISE PORTION; I NOTICED THE INBOARD LNDG LIGHTS AND RWY TURNOFF LIGHTS WERE LEFT ON. THESE ARE NORMALLY TURNED OFF BY THE CAPT PASSING THROUGH FL180. I MENTIONED TO THE CAPT THAT THEY WERE ON AND REACHED OVER AND TURNED THEM OFF WITH NO RESPONSE FROM HIM. THIS SHOULD HAVE BEEN ENOUGH OF A CLUE FOR ME TO DOUBLECHK THE ALTIMETERS; BUT I DIDN'T. [LATER WE NOTED] THEY WERE SET TO 30.11 INCHES/HG INSTEAD OF 29.92. ALL 3 ALTIMETERS (CAPT'S; FO'S; AND STANDBY) WERE STILL SET TO LCL SEA SETTING; NOT 29.92. ON INITIAL DSCNT INTO IAH; WE WERE ASSIGNED FL280 AND TOLD TO LOOK FOR TFC AT 1:30 O'CLOCK POS AND 1000 FT BELOW. I OBSERVED THE TFC ON TCASII CONVERGING AND ONLY 700-800 FT BELOW; INFORMED ATC WE WERE IMC AND THAT WE ONLY SHOWED 700 FT SEPARATION. ATC SAID OUR ALT APPEARED TO BE WRONG. WE BROKE OUT OF CLOUD COVER AND SAW WHAT LOOKED LIKE A SINGLE ENG TURBINE ACFT PASS DIRECTLY BELOW US. I THEN CHKED THE ALTIMETERS AND IMMEDIATELY REALIZED OUR MISTAKE. WE FIXED THE ALTIMETER SETTING TO 29.92 AND CLBED BACK UP TO THE REAL FL280. FLT CONTINUED ON TO DEST WITH NO FURTHER MISHAPS. THIS INCIDENT COULD HAVE BEEN AVOIDED TWICE. FIRST; ON CLBOUT FROM SEA THERE WERE INCREDIBLE VIEWS. FLT ATTENDANT RANG AND ASKED IF SHE COULD TAKE PICTURES. SHE ENTERED COCKPIT AS WE CLBED THROUGH 15000 FT AND STAYED FOR ABOUT 4 MINS. THIS WAS THE INITIAL DISTR THAT CAUSED US TO FAIL TO RESET ALTIMETERS TO 29.92. MY SECOND CHANCE TO CORRECT THE MISTAKE OCCURRED WHEN I NOTICED THE LNDG LIGHTS ON AND TURNED THEM OFF WITHOUT A THOROUGH CHK AS TO WHAT ELSE WAS AMISS.