An obviously dumb question, but did you turn Dictation on in System Preferences?
Turn it on, go to Sound in System Preferences and set which microphone you want to use for Line In. I also increased the volume on my Line In settings, which you can see the Input Level if you talk a little while you are playing with it. Then go click inside any text box and double click on the function key. Dictation will pop up if all is well. Start speaking, click the function key once to stop or click on the Done button.
If you've tried all of that and still have no luck, I don't know what to tell you.