TRAINING FLT CONTACTED COS TRACON TO ENTER ARSA AND GIVEN A SQUAWK CODE. CLOSE TO ARPT TRAINING FLT HAD NMAC WITH MLG ACR.

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APPROX 20 MI N OF THE ARPT (EDGE OF OUTER AREA OF ARSA); MY STUDENT CONTACTED APCH CTLR (WITH ATIS) TO ENTER THE ARSA AND LAND AT THE COLORADO SPRINGS ARPT. APCH ADVISED 'SQUAWK XXXX AND STANDBY.' HAVING ESTABLISHED RADIO CONTACT (PER AIM PARAGRAPH 101 M) WE PROCEEDED INTO THE ARSA TOWARDS THE ARPT AT 8000 FT MSL. AT ABOUT 5 MI N OF THE ARPT; I WAS ABOUT TO QUERY ATC; HAVING HEARD NO FURTHER INSTRUCTION SINCE WE WERE TOLD TO STANDBY. AT THAT TIME; AN MLG PASSED APPROX 500 FT OFF OUR R WING AT OUR ALT; ON FINAL APCH FOR RWY 17. I MADE AN IMMEDIATE L TURN AND QUERIED ATC AS TO WHAT THEY INTENDED TO DO WITH US. AT THAT TIME; WE WERE ADVISED TO CHK OUR SQUAWK. I PROCEEDED TO RECYCLE THE TRANSPONDER AND VERIFY THE CODE. IT WAS CORRECT. ATC THEN ADVISED THAT THE TRANSPONDER WAS READING 2000 FT LOW (APPROX 6000 FT MSL) AND ON A DIFFERENT CODE. WE WERE THEN GIVEN INSTRUCTION TO PROCEED ON FINAL APCH FOR RWY 17. APCH CTL THEN HANDED US OFF TO TWR; AND THE FLT LANDED WITHOUT FURTHER INCIDENT. IT IS MY BELIEF THAT THE PROBLEM AROSE FROM A COMBINATION OF 2 THINGS. FIRST OF ALL; THE PROBLEM WITH THE TRANSPONDER CAUSED CONFUSION FOR ATC. SECONDLY; ATC WOULD SEEM TO HAVE FORGOTTEN ABOUT US; AND THAT THEY ESTABLISHED RADIO CONTACT WITH US; THUS ALLOWING US TO ENTER THE ARSA.