AN HS-125 EXPERIENCED VARIANCE IN COCKPIT DISPLAYED ALTIMETERS AND ATC MODE C INDICATIONS.

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APPROX 1 HOUR INTO THE FLT AND A LITTLE WHILE AFTER LEVEL OFF WE RECEIVED A CALL FROM ATC ASKING US TO CLB AND MAINTAIN FL340. WE THEN RESPONDED SAYING WE WERE LEVEL AT FL340 AND ATC SAID THAT THEY WERE SHOWING US AT FL330. UPON A SUBSEQUENT CROSS CHK OF THE ALTIMETERS WE READ THE PLT AND STANDBY ALTIMETERS AT FL340 ALONG WITH THE ALT PRE-SELECT AT FL340 BUT THE COPLT ALTIMETER NOW READ FL330. ASSUMING THAT THE PLT AND STANDBY ALTIMETERS WERE INCORRECT BASED UPON ATC'S INFO AND THE COPLT ALTIMETER; WE COMPLIED AND CLBED TO FL340 BASED ON THE COPLT ALTIMETER IN ORDER TO OBTAIN A SAFE ALT FOR OUT DIRECTION OF FLT. UPON LEVELING AT FL340 VIA THE COPLT ALTIMETER WE CALL LEVEL AT FL340 AND ATC CONCURS AND HANDS US OFF TO ANOTHER CTLR. WE AGAIN CHK IN AT FL340 AND TELL THEM WE ARE EXPERIENCING DIFFICULTY WITH OUR ALTIMETERS AND HE RESPONDS WITH; 'CLB AND MAINTAIN FL360 FOR CROSSING TFC.' WE THEN QUICKLY ROLL IN FL360 INTO THE COPLT ALT PRE-SELECT AND COMMENCE A CLB TO FL360. DURING THE CLB TO FL360; THE COPLT ALTIMETER BECOMES ERRATIC AND BEGINS TO HANG AND OR MOVE WILDLY +/- 400 FT. THE ALTIMETER SETTLES DOWN AND WE CALL LEVEL AT FL360 AND SHORTLY THEREAFTER; WE SAW TFC ON TCAS THAT WAS APCHING AT THE SAME ALT BUT SEVERAL MILES AWAY. I REQUESTED A CHANGE IN HDG TO MAINTAIN SEPARATION WHILE WE WORKED ON THE PROBLEM. AFTER RECEIVING CLRNC TO TURN R 25 DEGS; THE COPLT ALTIMETER BEGINS TO MOVE WILDLY AGAIN; AND DURING THE TURN THE AUTOPLT DISCONNECTS WHILE WE WERE PRACTICING 'SEE AND AVOID' TECHNIQUES. I THEN REQUESTED TO CHANGE XPONDERS IN ORDER TO TRY AND TROUBLESHOOT THE PROB. UPON CHANGING TO XPONDER #2 AND THEN VERIFYING WITH ATC WHAT ALT THEY WERE SHOWING US AT; THEY RESPONDED WITH LEVEL AT FL370. THIS INFO DID NOT COMPARE WITH WHAT SHOULD HAVE BEEN SHOWING. WITH A LACK OF CONFIDENCE IN THE EQUIP; I REQUESTED A DEPARTURE FROM RVSM AIRSPACE TO FL280 IN ORDER TO DETERMINE HOW TO PROCEED. THE REQUEST WAS GRANTED BY ATC AND DURING THE DSCNT; THE COPLT ALTIMETER WAS HANGING IN PLACE AND ERRATIC RELATIVE TO THE OTHER INSTRUMENTS. THE COPLT ALTIMETER SETTLED DOWN AS WE DSNDED TO FL280. WE CONTINUED THE FLT ABLE TO MAINTAIN FL280 WITH NO FURTHER PROBLEMS AND ATC CONFIRMED WE WERE LEVEL AT FL280. WE CONTINUED TO MONITOR TCAS AND PROCEED CAUTIOUSLY TO THE DEST WITH AN AIRPLANE THAT; BY ALL INDICATIONS; WAS APPEARING TO OPERATE NORMALLY DURING THE REMAINDER OF THE FLT. THE MECHANICAL IRREGULARITIES WERE DOCUMENTED AND THE ACFT DOWNED TO DETERMINE THE CAUSE AND CORRECTIVE ACTION NECESSARY TO PREVENT A RE-OCCURRENCE OF THE PROBLEMS ENCOUNTERED. CALLBACK CONVERSATION WITH RPTR REVEALED THE FOLLOWING INFO: THE RPTR STATED WHEN MAINT STARTED TO TEST THE FO'S REPLACEMENT ALTIMETER; IT WAS DISCOVERED THE UNIT WAS WIRED TO THE #1 XPONDER. THE CAPT'S ALTIMETER WAS FOUND WIRED TO THE #2 XPONDER. RPTR STATED THIS SITUATION HAD EXISTED FOR APPROX ONE YEAR AND ONLY WHEN THE ALTIMETER FAILED WAS THE SITUATION DISCOVERED. RPTR BELIEVES THE PROPER TESTING WAS NOT ACCOMPLISHED AT THE HVY MAINT CHK AND ACFT WAS RELEASED FOR SVC IN THIS CONDITION.