Epubcheck should never be complaining about proper use of & for & unless is it used improperly. As it is a xml entity, it is always legal and using a numeric version should never be required.
So my guess is your are misusing it. Perhaps using it as a direct child of the body tag or using it as a direct child of a tag that does not hold text.
Please show the exact error message from epubcheck and the corresponding line or lines of source code.
Preserve Entities purposely does not handle the unneeded numeric equivalents for the standard xml entities as the standard xml entities are perfectly legal xml and xhtml.
Preserve enties requires an entity not a unicode character escape. So numeric entities anyways have a # and in hexadecimal form are followed by X.
For example: the named entity is only valid in epub2. epub3 requires numeric entities instead of named entities (other than the xml standard entities). So under epub3, nbsp would be written as: ( ignore the extra spaces )
Code:
& # 1 6 0 ;
& # x A 0 ;
The standard xml entities include & < > " '
Do not use Preserve Entities to change any of these standard xml entities to something else, especially the "&" as it is the escape character for all entities.
The CodeView Editor uses XHTML syntax colouring and highlighting to attempt to indicate a number of pure whitespace related unicode characters that are non-breaking in nature.
If the preserve entities dialog properly includes them, they are converted to their entity equivalents as a last pass from both mend and prettify.