Raizlabs has released a free application to help php developers encode and encrypt php scripts. The PHP obfuscator application encodes and obfuscates PHP code to make the output difficult to reverse engineer. The application requires no pre-modifications to code and no additional components on your server and allows for encoding of functions, variables and the removal of whitespace. The software was developed as a side project for the newly released PHP Email manager.
The software can be downloaded here: http://www.raizlabs.com/software/phpobfuscator/
Additional resources for developers looking to modify and improve the code are available here: http://www.codeproject.com/csharp/php_obfuscator.asp