Brad, yes it's ok. There is really no benefit to posting the password hashed (not encrypted). First, you have to use javascript to do that, and it's easily circumvented. Hashing of the submitted password should be done server side to compare with the stored hashed value.
Edit:
Plus, run the following and see what you get:
<?php echo md5(NULL);
Thus, md5 always returns a value.
On top of that try running the following:
<?php var_dump(isset(md5($_POST['password'])));
You'll see the following: Fatal error: Can't use function return value in write context
isset() can only be used with a variable.
Edit:
There is a difference between hashing and encryption. MD5 is a simple hash, one that isn't even cryptographically secure.
Yes, you should not submit passwords in plaintext to your server, but hashing them client side is the same thing. You should be using HTTPS for password form submissions, this is how you encrypt communications between your server and the client.