This is most definitely a bug.  I've replicated by producing the following tree in my code:

(This is well-formed XML so I have no idea why there would be a problem.)

---------BEGIN XML----------------------------
<?xml version="1.0" encoding="iso-8859-1"?>
<classes>
	<class classid="0" parentid="" class_level="0">Root<class classid="1" parentid="0" class_level="1">Adhesives </class>
		<class classid="3286" parentid="0" class_level="1">Agricultural and Farming Products</class>
		<class classid="3283" parentid="0" class_level="1">Architectural and Civil Engineering Products</class>
		<class classid="14" parentid="0" class_level="1">Automatic ID</class>
		<class classid="45" parentid="0" class_level="1">Chemical Processing </class>
		<class classid="124" parentid="0" class_level="1">Cleaning Products </class>
		<class classid="148" parentid="0" class_level="1">Communication Systems </class>
		<class classid="264" parentid="0" class_level="1">Computer Hardware </class>
		<class classid="3281" parentid="0" class_level="1">Construction Equipment and Supplies</class>
		<class classid="489" parentid="0" class_level="1">Controls </class>
		<class classid="589" parentid="0" class_level="1">Display </class>
		<class classid="612" parentid="0" class_level="1">Electrical Equipment </class>
		<class classid="772" parentid="0" class_level="1">Electronic Components </class>
		<class classid="3282" parentid="0" class_level="1">Explosives,  Armaments, and Weaponry</class>
		<class classid="920" parentid="0" class_level="1">Fasteners </class>
		<class classid="954" parentid="0" class_level="1">Fluid </class>
		<class classid="3461" parentid="0" class_level="1">Food Processing </class>
		<class classid="3288" parentid="0" class_level="1">Health, Medical, </class>
		<class classid="1029" parentid="0" class_level="1">HVAC</class>
		<class classid="1068" parentid="0" class_level="1">Labels Tags Signage </class>
		<class classid="3279" parentid="0" class_level="1">Laboratory and Research Supplies and Equipment</class>
		<class classid="1083" parentid="0" class_level="1">Lubricants</class>
		<class classid="1106" parentid="0" class_level="1">Machinery </class>
		<class classid="1424" parentid="0" class_level="1">Material Handling </class>
		<class classid="1303" parentid="0" class_level="1">Materials </class>
		<class classid="3284" parentid="0" class_level="1">Mechanical Components and Assemblies</class>
		<class classid="1620" parentid="0" class_level="1">Mechanical Power Transmission</class>
		<class classid="3462" parentid="0" class_level="1">Mining, Oil Drilling </class>
		<class classid="1728" parentid="0" class_level="1">Mounting </class>
		<class classid="3285" parentid="0" class_level="1">Non-Industrial Products</class>
		<class classid="1782" parentid="0" class_level="1">Optics </class>
		<class classid="2054" parentid="0" class_level="1">Packaging Equipment </class>
		<class classid="2151" parentid="0" class_level="1">Paints </class>
		<class classid="2185" parentid="0" class_level="1">Plant Furnishings </class>
		<class classid="2196" parentid="0" class_level="1">Portable Tools</class>
		<class classid="2286" parentid="0" class_level="1">Printing </class>
		<class classid="3539" parentid="0" class_level="1">Problematic Headings</class>
		<class classid="3463" parentid="0" class_level="1">Retail and Sales Equipment</class>
		<class classid="2328" parentid="0" class_level="1">Robotics</class>
		<class classid="2369" parentid="0" class_level="1">Safety </class>
		<class classid="2399" parentid="0" class_level="1">Sensors Monitors </class>
		<class classid="3280" parentid="0" class_level="1">Services</class>
		<class classid="2585" parentid="0" class_level="1">Software</class>
		<class classid="2697" parentid="0" class_level="1">Test </class>
		<class classid="3919" parentid="0" class_level="1">Textile Industry Products</class>
		<class classid="3167" parentid="0" class_level="1">Thermal </class>
		<class classid="3190" parentid="0" class_level="1">Timers </class>
		<class classid="3287" parentid="0" class_level="1">Transportation Industry Products</class>
		<class classid="3193" parentid="0" class_level="1">Vision Systems</class>
		<class classid="3208" parentid="0" class_level="1">Waste Handling Equipment</class>
		<class classid="3246" parentid="0" class_level="1">Welding Equipment </class>
	</class>
</classes>
--------------END XML---------------------------

Hi,

I have the same problem. My config is :
- PHP 5.2
- libxml Version 2.6.16
---------
<?php
$xmlStr = "<?xml version='1.0' encoding='UTF-8'?><root></root>";
$xml = new SimpleXMLElement($xmlStr);
$xml->addChild("foo",utf8_encode("start < > end"));
echo "foo tag added ok";
$xml->addChild("bar",utf8_encode("start & end"));
echo "error on bar tag because of &amp;";
$result = $xml->asXML();
echo "<pre>".htmlentities($result)."</pre>";
?>
-------------
you can run this script at : http://www.kitpages.fr/test/bugSimpleXml.php

I tried the workaround below and it seems to work:

$xml->addChild('element', '');
$xml->element = str_replace("&", "&", "value of the element");

PHP 5.2.4
Looks like the problem appears when there's node already exists being overwritten

// works ok, doesn't require encoding:
$a = simplexml_load_string('<a/>'); 
$a->b = "& < ' ";

// doesn't work, requires encoding:
$a = simplexml_load_string('<a><b>test</b></a>'); 
$a->b = "& < ' "; 

// doesn't work, always requires encoding
$a->addChild('b', "& < '");
$a->addAttribute('b', "& < '");

// works ok, never requires encoding
$a['b'] = "& < '";

A little hack to get around this bug:

function &safe_add_child(&$sxml, $name, $value) {
  $safe_value = preg_replace('/&(?!\w+;)/', '&', $value);
  return $sxml->addChild($name, $safe_value);
}

I'm running PHP 5.2.9 on Linux and this bug is still alive and well making SimpleXml absolutely inappropriate for XML communications between systems.
<code>
$safe_value = preg_replace('/&(?!\w+;)/', '&amp;', $value);
  return $sxml->addChild($name, $safe_value);
</code>
Is just plain wrong. I'm communicating user input directly to a bank as I can't know how the third party will parse their xml.

Still seeing this issue... 

$order_x->addChild('location', '1st & 52nd');

gives "Warning: SimpleXMLElement::addChild(): unterminated entity reference"

If I run it as

$order_x->addChild('location', htmlspecialchars('1st & 52nd'));

I have no problems.

Behavior as defined by DOM specs. No warnings are issued are from either of the 2 
examples in the reproduced code.

addChild() method described in later reports works are defined by specs. Use the 
simplexml property accessors for auto escaping.

I also had this issue, one thing that might not have been included in the original reproducing of the code is that the DOMElement may have been extended. I know mine is extended so Reproduce the code by extending the DOMElement class. I also extended the DOMDocuement class so try that too. So no the status is not Bogus, just to tested thoroughly.

With simpleXML, addChild($name, $value) works really weird (tested on 5.3.1 on win): in the value, the characters < and > are correctly esacped to &lt; and &gt; but ampersands cause the "unterminated entity reference" message. I would understand if it escaped nothing, or if it escaped everything, but this seems weird.

Also, no matter what the final decision about this bug will be, this should be documented really well in the SimpleXML docs. It is confusing and I could imagine it could cause security issues in some applications.

I am still seeing this bug in PHP 5.3.8

I'm still observing this issue (by the way, why is it marked as "bogus"?).

Even the simplexml property accessors does give me the warning, such as:

$a['b'] = "& < '"; // GENERATES THE WARNING!!!!!!!!

This is bogus because & as character is needed in the attribute values to start an 
entity to express character references. Otherwise it would not be possible to set 
the superset of all XML attribute values (AttValue; http://www.w3.org/TR/xml/#NT-
AttValue), the expression wouldn't be distinct.

Like you need to write "\t" in a PHP string to express a tab and therefore "\\" to 
express the slash. I hope this clarifies this a bit.

Still facing this issue. & character in text is leading to this E_WARNING.