During the Apollo missions that landed on the Moon, astronauts found that moondust was keen to get everywhere where they didn't need it - even into their lungs... But for future astronauts on the Moon, this dust may prove to be a vital source of breathable oxygen. That's because 43% of the dust that constitutes the upmost layer of the soil on the Moon is actually oxygen. Of course it is in a bond form, so you turn to some tricks if you want to breathe it.
Moondust consists of different oxides, such as silicon dioxide (sand), but it also contains a lot of ferro-, calcium, and magnesium oxides. The oxygen that is available in this form has to be simply taken out from these compounds that make up the soil, preferably in a way that can be carried out even on the Moon.
Eric Cardiff - who is leading a group at the NASA Goddard Space Flight Center that is searching for ways of providing oxygen for human Mars and Moon missions - says that we simply have to evaporate the soil. Cardiff is working on a technology that can heat the soil to a high enough temperature for it to release the oxygen bound in it. Every oxide has such a temperature, at which it simply disintegrates into its constituents. This technique is called vacuum pyrolysis (where pyro stand for "fire" that is used to decompose ("lysis") the stuff. A lot of reasons suggest that pyrolysis is the best method: it doesn't need materials that have to be brought there from Earth, or any sort of strange or expensive stuff. Lunar dust collected in place have to be heated and that's it, there's your valuable oxygen.
Cardiff and his group took to try out their theory in practice. They didn't use real lunar dust that has been brought back from the Moon by the Apollo astronauts, as it's very expensive. There's a chemically similar, but easily obtainable material, which is a mixture of a mineral called ilmenite (a titanium/iron ore), and a basalt called Minnesota Lunar Simulant, and ground glass. They heated this mixture to 2500 C degrees, which resulted in 20% of it evaporating into oxygen. The resultant slag is an oxygen-poor metallic, glass-like material, that can possibly used as building material, as an isolator against radiation, or such things. NASA's Langley Research Center is going to work on how to utilize the resultant slag, and how to shape it easily. Further experiments are going to try to make this method more efficient. At lower temperatures, and in a higher grade vacuum, less energy will be needed to extract the oxygen. In the first experiment, they used a one millionth bar pressure, their next aim is to go down to a thousandth of that, which is believed to create conditions in which significantly lower temperature would suffice for the decomposition.
There are also other groups working on extracting oxygen from lunar regolith. For a comparison, Mark Berggren's group at Pioneer Astronautics could extract 15 kg oxygen from 100 kg of lunar soil simulant, using a method that uses carbon monoxide. (with their method, carbon monoxide is added to the soil at high temperatures, which then releases carbon dioxide. Using hydrogen it is then separated to carbon monoxide and water, and the water can be harnessed through electrolysis)
NASA's Regolith Excavation Challenge will pay $ 250 000 if you can meet their rules (producing 10 pounds of oxygen in 8 hours, see the link). This event will be held in 2008, however the detailed rules are not prepared yet, apparently. The success of this challenge would be very important, as oxygen is not only used by humans, but it's also popular oxidizer in rockets. Being able to produce it economically on the Moon would save a lot of money.