About the Internet being required for the voice recognition... maybe not. Note that we already have voice recognition built in to the iPhone 4! It is speaker independent, needs no training, and no Internet connection. However, the things you can say are quite limited.
So I'm guessing that although you will want and perhaps need an Internet connection to do general dictation on the iPhone 5, you might be able to do many simple things even without one. Certainly more than you can do now. Maybe some of the type of things Siri can do now, like lookup a contact or launch an app. Things whose data can be computed, perhaps over the Internet, but cached in the device for recognition offline, such as app names, contact names, and the like. But for general dictation, the Net will be required.
I also think with general speech-to-text enabled, it's about time the API for text-to-speech is released to developers. Text-to-speech is mature and has been in the system a long time, as can be seen in VoiceOver. Give developers access to both speech-to-text and text-to-speech, and we will see some very cool apps spring forth.
Oh and one other thing, I thought I saw something about Apple getting a patent or doing research on efficiently listening for voice input commands without you having to hit any buttons at all? I'd like to ask the iPhone sitting over by the nightstand what time it is...
