An MD83 pilot reported an altitude deviation on climbout from IWA after he mis-set his altimeter during preflight.

Narrative

In a climbing right turn with frequency change; right seat (non flying pilot) voiced 1000 FT to go and then continued communication with ATC and I noticed my altimeter showed 2000 FT to go to initial cleared altitude of 4000 FT. I confirmed the new cleared to altitude of 7000 FT and then started to sort out the altimeter discrepancies. At this time; ATC questioned what altitude we were initially climbing to and stated he showed us at 4600 FT (initial 4000 FT) and gave us a new/current altimeter setting at which I noticed my altimeter set at 28.89 instead of 29.89. Reset to proper altimeter setting and continued climb to 7000 FT with no further query from ATC. I thought I set the current altimeter setting of 29.89 in both my primary and stand-by altimeter upon performing the receiving checklist for first flight of the day. I believe what happened is the arm of the altimeter was covering up the second digit of the altimeter setting in the Kollsman window; which happens while sitting on the ramp at IWA.