A C172 PLT DID NOT SET HIS XPONDER PROPERLY IN EVV'S AIRSPACE.

Narrative

AFTER BEING CLRED FOR TKOF ON EVV RWY 36; I TURNED MODE C XPONDER TO 'ON' POS INSTEAD OF 'ALT' POS. MY VFR CLRNC WAS TO MAINTAIN RWY HEADING AND REMAIN AT OR BELOW 2000 FT MSL. AFTER BEING HANDED OFF TO DEP (2 MINS INTO FLT); I WAS GIVEN DISCRETION ON ALT. I ACKNOWLEDGED THAT 'ALT MY DISCRETION' AND PROCEEDED TO CLB TO 3500 FT MSL. SHORTLY THEREAFTER (ABOUT 5 MINS INTO FLT) I WAS TOLD TO TURN ON COURSE (040 DEGS). AT ABOUT THIS POINT ATC REQUESTED ALT AND NOTIFIED ME THEY DIDN'T HAVE MODE C. I SWITCHED XPONDER TO 'ALT' AND RPTED MY ALT AT 3500 FT. ATC THEN ISSUED TA ABOUT 2 MI DSNDING THROUGH 4500 FT. TFC WAS NOT A FACTOR. HOWEVER; AFTER ANALYZING THE CHAIN OF EVENTS; I BELIEVE THAT THE CTLR'S CORRECTION OF MY ERRORS WAS KEY IN BREAKING A CHAIN THAT COULD HAVE HAD A MUCH WORSE OUTCOME. I SHOULD HAVE HAD THE XPONDER ON 'ALT' AND SHOULD HAVE RPTED MY INTENTION TO CLB TO 3500 FT AFTER GIVEN DISCRETION. AN ADDED FACTOR WAS A RUSHED RUN-UP AND TKOF PREPARATION. I SHOULD HAVE BEEN MORE DELIBERATE WITH MY PRE-TKOF CHKLIST; MAKING SURE MY XPONDER WAS SET PROPERLY.