MIL WDB DESCENDS THROUGH OCCUPIED ALT CAUSING LESS THAN STANDARD SEPARATION.

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ON DESCENT INTO KELLY WE WERE CLRED TO DESCEND AND MAINTAIN 4000' MSL. I DEPARTED 10000' AND WAS MAKING A RAPID DESCENT OF AT 3000-3500 FPM DUE TO CLOSE PROX TO KELLY. DURING THIS DESCENT THE PAX LOADMASTER FROM THE TROOP COMPARTMENT CALLED ON INTERPHONE STATING WE HAD TWO SICK CHILDREN. DURING THE ENSUING CONVERSATION I COMPLETELY MISSED A REVISED ATC CLRNC TO LEVEL AT 8000'. THIS CLRNC WAS RECEIVED/ACKNOWLEDGED BY THE COPLT AND OUR AUTOMATIC ALT ALERT WAS RE-SET TO 8000'. THE COPLT THEN REQUESTED ALL CREW MEMBERS TO AVOID TALKING ON INTERPHONE WHILE WE WERE ON THE RADIO. IT WAS SHORTLY AFTER THIS THAT WE OBSERVED ACFT TFC ABOVE US AT OUR 12 O'CLOCK. SAT APCH CALLED THE TFC AT 12 AND LOW CAUSING MY COPLT TO REALIZE THAT WE HAD DESCENDED THROUGH 8000' - HE IMMEDIATELY TOLD ME TO LEVEL AT 6000'; CALLED SAT APCH WITH A TALLY ON THE TFC AND TOLD THEM WE HAD MISSED THE LEVEL OFF AT 8000' BUT WERE NOW LEVEL AT 6000'; AND REQUESTED INSTRUCTIONS. SAT APCH SAID TO REMAIN AT 6000' AND ASKED US TO CONFIRM WE HAD THE TFC; WHICH WE CONFIRMED. NO FURTHER DEVIATIONS OCCURRED AND WE LANDED AT KELLY WITHOUT INCIDENT. FACTORS - IMPROPER USE OF INTERPHONE - CREW TALKING 'OVER' IMPORTANT INCOMING RADIO MESSAGES - FAULTY CREW COORDINATION - PLT FLYING WAS NOT TOLD OF REVISED ALT CLRNC - POSSIBLE EQUIPMENT MALFUNCTION - OUR ALT ALERT ALTHOUGH PROPERLY SET DID NOT ALERT US TO LEVEL OFF AND DID NOT ALERT US TO GOING BELOW ALT - ENTIRE CREW HAD TWO CONSECUTIVE XAOO/XBOO A.M. CREW ALERTS END OF LONG DAY AND TIRED. ALL THESE FACTORS EMPHASIZE AGAIN WHY INTERCREW COMMUNICATION; STANDARDIZED PROCEDURES AND DISCIPLINE ARE VITAL TO SAFE OPERATION. SUPPLEMENTAL INFORMATION FROM ACN #88650: I HAD INITIALLY SET 4000' IN OUR ALT ALERT WINDOW; AND I RESET IT TO 8000' AND ANNOUNCED THE REVISED ALT OVER INTERPHONE (AND TO ATC). OBVIOUSLY I ERRED BY NOT INSURING THE PLT FLYING RECEIVED THE REVISED ALT RESTRICTION. THE ALT ALERT SYSTEM DID NOT ALERT US AS WE DESCENDED BELOW 8000' BECAUSE IN THE MLT CARGO PLANE THE SYSTEM IS AUTOMATICALLY DISABLED ONCE THE GEAR IS DOWN.