The comment from 'rmays at castlecomm dot com' is incorrect: single quotes cannot be backslash-escaped inside a single-quoted string when constructing a shell argument. The output from this function is in fact correct. It drops out of the single-quoted string, includes a literal single quote with a backslash-escape, then resumes the single-quoted string. Observe:
[shellarg.php]
<?php
system("echo ' single quote\'d '");
system("echo ' single quote'\''d '");
?>

$ php shellarg.php 
sh: -c: line 0: unexpected EOF while looking for matching `''
sh: -c: line 1: syntax error: unexpected end of file
 single quote'd