The Tex filter not works. In the texdebug.php page shows some errors as attached image.
My environments are
Moodle 1.9.9 build 20100609
and everything in server check page show OK.
That warning tells it all - you site php.ini has some disabled functions ( escapeshellarg, system,... ) and tex filter can't execute the needed commands - not even with mimetex.xxx )
This is one of those problems that you need to solve with your host - otherwise there is no work around. You can see a line for disable_functions in php.ini / php info and on "normal sites" people leave disable_functions empty and use other security methods - a solution to disable functions of php is typical only for shared hosts.
See for example http://moodle.org/mod/forum/discuss.php?d=150982#p662397