I busted out wireshark to answer my own question. The data is actually getting encoded as speex and being posted to http://www.google.com/speech-api/v1/recognize . Maybe google is about to open up its speech recognition API to the masses?

They are doing post requests to there own servers, for recognition.

reference: http://src.chromium.org/viewvc/chrome/trunk/src/chrome/brows...

api url: https://www.google.com/speech-api/v1/recognize

If it's anything like speech recognition in Android, it's all server-side..so this should be technically possible in any browser as long as google allows it.

from unscientifically looking at network sent packet counts, it's definitely phoning home for the answer.

You can't see it in the Chrome Developer Tools/Network UI, but the browser is sending the recorded audio input to a webserver. Unfortunately it's HTTPS, so a bit hard to decode the URL/content of the message without using a proxy.

Speech for HTML Input Elements https://docs.google.com/View?id=dcfg79pz_5dhnp23f5

That does not specify where the recognition is happening.