B727 CREW MISSET THE ALTIMETER AT THE TRANSITION ALT. THE CAPT MISSED THE ALTIMETER BY 1 INCH.

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WHILE AT FL330; CLRED TO MEM VIA GILMORE 3 ARR AND TOLD TO CROSS 10 NM N OF GQE VOR AT 10000 FT. LCL MEM ALTIMETER SETTING WAS UNUSUALLY HIGH (30.62 INCHES). PASSING FL180; CAPT AND FO BOTH SET THEIR ALTIMETERS TO THE LCL SETTING AND WE COMPLETED THE IN-RANGE CHKLIST. CAPT WAS PF AND LEVELED OFF AT 10000 FT. AFTER PASSING OVER GQE VOR AND ESTABLISHED INBOUND TO MEM. APCH CTLR TOLD US TO DSND TO 8000 FT AND ASKED US TO CHK OUR ALT. I LOOKED AT THE CAPT'S ALTIMETER AND RPTED US LEVEL AT 10000 FT AS CLRED. THE CTLR THEN ADVISED US TO RECHK ALTIMETER SETTING 30.65 INCHES. AT THAT POINT; THE CAPT NOTICED THAT HE HAD INADVERTENTLY SET 29.65 INCHES IN HIS ALTIMETER WINDOW. I XCHKED MY ALTIMETER AND DISCOVERED WE HAD; IN FACT; LEVELED OFF EXACTLY 1000 FT HIGH (11000 FT). NO LESS OF SEPARATION OCCURRED; AND ATC SAID 'DON'T WORRY ABOUT IT.' CONTRIBUTING FACTORS: UNUSUALLY HIGH ALTIMETER SETTING. POOR XCHK OF ACTUAL ALTIMETER SETTINGS SET BY ALL 3 CREW MEMBERS. THE DIFFERENCE IN ALTIMETER SETTINGS IN THE CAPT'S AND FO'S ALTIMETERS (29.65 INCHES VERSUS 30.65 INCHES) RESULTED IN EXACTLY A 1000 FT DIFFERENCE IN ALTIMETER READOUTS. BOTH 100 FT POINTERS WERE PERFECTLY VERT; LENDING TO A FALSE SENSE THAT WE HAD LEVELED OFF OF 10000 FT AS CLRED.