Can I use Dictation in OS X Mountain Lion offline?
No, your speech is still sent to the Siri/Nuance servers for processing, so you can't use dictation without an Internet connection.

An alternative would be to use a third-party dictation app like Dragon Dictate.

While your machine is probably powerful enough to handle conversion (although maybe not as quickly as Apple's servers), it makes a lot of sense for Apple to keep things on their end. The software used for conversion is doubtlessly quite complex and would be a huge download. Living on their servers also means that they can push updates as frequently and quickly as they like.