Since Firefox does not support MP3 or AAC, and IE/Safari do not support OGG they would have to do it in Flash unless they are transcoding server side or only supporting certain browsers.
The reason why they don't go full <audio> and whatever is not because of compatibility. It's about security and copyright infringement. It would be free downloads for all and that would make all the RIAA execs they have deals with very mad.
On pandora.com/newpandora it says "The front-end technology has been rebuilt in HTML 5" but doesn't mention anything about the actual playing of the audio.
The whole point of HTML5 tags like <audio> are to make content completely open. Unfortunately, that's the exact opposite of what what any major record label wants. I'm pretty sure they'll use flash in the background to play the audio, even if the entire site all the way down to the progress bar are HTML5.
