As you have realized, the problem results from having Level 3 in the wrong
position in the "Number format" box. Since all the levels are represented by
1s, it's all too easy to get confused if you try to "fix" the numbering. The
best solution is therefore not to try to fix the numbering but instead to
start from scratch.

1. Being careful to enter the Modify Style dialog from a Heading 1, select
Format | Numbering and choose Level 4.

2. Delete everything in the "Number format" box.

3. In the "Previous level number" box, select Level 1. This will insert a 1
(with a gray background) in the "Number format" box. Type a period after it.

4. Repeat to insert Level 2 from "Previous level number" and add a period
after it.

5. Repeat for Level 3.

5. Select 1, 2, 3,... as the "Number style." This will insert a fourth 1 in
the box. Add a period after it if desired.

6. You'll have already made sure that all the levels are linked to the
corresponding styles, that the indents and tabs are set correctly, etc., so
click OK as many times as needed to close out of all the dialogs. This
should solve your problems.

If you want to try to "fix" it (since you know which 1 is in the wrong
place), delete the first 1 and its period; then place the insertion point
before the last 1, select Level 3 in the "Previous level number" box, and
type a period after it.