From previous discussion threads, I've read discussion about using Peter Jipsen's ASCIIMath notation as a possible input format. I know that for some people, this was a concern since it requires that students have MathML support in their browsers.
For a project of my own, I wrote an ASCIIMath to TeX convertor, which allows ASCIIMath to be rendered to images by MimeTeX or other TeX renderers. For the heck of it, I put together a Moodle filter, based on the Algebra filter, for rendering ASCIIMath in Moodle.
It's available at: http://www.pierce.ctc.edu/dlippman/asciimathtex/AMT.html
Alternatively, the ASCIIMathMLwFallback.js script found on the same page could be modified and placed in the Moodle header, which would allow MathML to be used when available, and images to be used otherwise.
I have to admit I'm not really a Moodle user, so this filter isn't well tested, but I've certainly found the Moodle discussion boards helpful for research and wanted to give something back
-David Lippman, www.imathas.com