There is an excellent explanation of, and discussion about, altimeter settings at http://www.polestaraviation.com/?p=23
Being from the UK it also involves an interesting discussion on a complication that many other countries, such as the USA, don't have to bother with - namely QFE (air pressure at Field Elevation to give a zero altimeter setting at the airfield) which tends to confuse new listeners to UK and Western European ATC.
To add to the confusion (which you will appreciate after reading the discussion though it has been going on for many years so seems to work for most pilots) consider that there are a number of airfields in the UK (such as Fairford which gets a mention) which are managed by, and primarily used by, the USAF which mainly use QNH quoted in inches whilst the RAF and local civilian fliers land on QFE in millibars!
Then read more fascinating (mainly UK) pilot comments at http://www.pprune.org/forums/archive/index.php/t-39272.html
Now just to really spice it up go on to read the comments at http://www.geocities.com/daneth71/QFE.html
. Not only do the old Soviet Bloc ATCs (who are nowadays very busy with all the Europe - Asia traffic taking the 'shortcut' route through their airspace) use metres for altitude, instead of feet and Flight Levels, they also use local QFE below transition altitude and not QNH. These figures can be VERY different at higher altitude airports.
Perhaps one day, aviation, which has made the world so small, will be able to standardise these rather important safety related things but don't hold your breath (at any air pressure) waiting for it to happen!