Someone else may correct me on this part, but I believe that the download is simply for activation and would be a small string of text, hardly noticable if you were connected, even at dialup speeds.
The headset microphone is not required, but will vastly increase the dependability of the speech recognition. If you are using a desktop or webcam microphone, you may find you have to keep your head in the same location and your face pointed the same direction to get much accuracy. The microphone picks up every vibration in the room, including echos of our voice which our brains can ignore. Moving your head around changes those echos, as well as changes the levels of direct pickup. Those changes can distort how Hal hears words.
I use two different headset microphones which were relatively cheap at RadioShack. One is a $19 product which works fairly well. The other is a $39 USB microphone that seems to work much better, but requires me to change my audio settings, so I only use it when I am going to be dictating or working with Hal for some length of time.
For a while I experimented with using FRS (Family Radio Service) radios as the microphone, and actually got it to work. But since I don't have my home automation system set up yet, it remains largely unused. It does allow me to walk around the house/yard/neighborhood talking to Hal, but I don't find much of a reason to do that. It consists of two WalMart radios ($28/pair) with one hooked up to my sound card and set on VOX.
I hope to switch over to BlueTooth, but haven't done so yet. [:I]
Hope that helps! [8D]