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In the US METARs, the altitude of a cloud layer or anything like visibility is given in Flight Levels in THREE DIGITS.  I don't know if this holds true for the rest of the world, but in the US, there is NO FL18, FL1, FL120.  Any altitude below 18000 is not a flight level, you say it as it is (i.e. 2400, 15000).  There are some more points to be made that relate with flight levels, but that's another topic..

Fozzer, are those the UK FLs?

The reason for setting your altimeter is to calibrate it to the surface air pressure. An altimeter is just a fancy barometer set to tell height instead of pressure. As you fly from one weather system into another the pressure may be quite different yet an altimeter set to one pressure will read the same altitude. In other words you can be reading 5,000 ft and fly right into the ground.

When getting ready to land you need to set your altimiter to the current barometer setting on the ground so that your altimiter will read the correct altitude. Actually you should update your altimeter regularly along the way.

Here's an illistration I dug out of my old flight manual that does a good job of illustrating:



Notice that eventually, if this plane keeps flying the way it is and the pressure at ground level reaches 25.84, someone is going to get scraped off the ground. It's unlikely but possible. What it can do is lead to a huge error in actual altitude which could easily lead to an accident and yet his altimeter will still read 4,000 ft.

Of course if you aren't using real weather or are setting your weather by hand you don't need to worry much about altimeter settings as long as it's set to the current ground conditions prior to takeoff. The setting the game uses 29.92 is just the default which happens to be the average sea level barometric setting.