I was referring to the registration of copyright, which appears to be a requirement [www4.law.cornell.edu] to get an injunction or to sue for statutory damages. Let's just assume that the code utilizes a certain methodology that would possibly allow it to be patented (based on the actual study of existing patents in this particular field).
The source code is compiled (if needed) each time the application server (CMS is a simplification) starts. Your idea to encrypt or precompile some part of the program may work if I rewrite it in another language, I'll have to investigate if/how this can be done for the OS that they might be using. I've seen it done with a commercially licensed database adapter for this CMS.
Using some sort of WSDL/SOAP interface and running the core code on my server would not change the fact that they're still dependent on us in order to run their app. I have a strong feeling that this is one of the primary reasons for them to want to host the code.
My dilemma is that we have been unable to sell the use of this plugin (lack of resources/experience, too advanced or specific, market conditions, whatever) and that now somebody shows up who is fully aware of its potential. My understanding so far is that they are considering use of the plugin within their organization, not wishing to develop it as a commercial application or service. The implementation that we run ourselves as a glorified testcase shows reason to believe that the SAAS service has potential to take off.
I posted this in "business issues" because I think that under the right circumstances, an agreement with a larger company could provide a source of funding and enough visibility to jumpstart the SAAS business. My hope is that someone here has already gone through a similar decision making process and would want to share their insights.