I have the ~$80 apple earbuds, and it has a built-in microphone which works fine. I've used it for skype and taking calls. In Preferences, the drop down for Dictation's input has 'Line-in", but when selected, Dictation does not hear me. In Sound preferences, 'Line-in' has the full title of 'Audio Line-In Port', so it is 'there'.
So I'm just curious why Dictation won't listen via my earbud microphone.