"Chats that have been taken off the record aren't stored in your Gmail chat history, or in the Gmail chat history of your contact. You and the person you're talking to can both see when a chat is taken off the record, and you'll be notified if off the record mode is disabled. Your off the record settings will apply whenever you chat with this person, until one of you makes a change."
Let's say you want to know if your co-worker Michael is really offline. If you start a chat when he is online and select "go off the record", none of your messages will be saved in Michael's Gmail account. That means the next time Michael appears to be offline and you send a message, there are three possibilities:
1. Michael is offline or he has blocked you: Google will display the error "Michael did not receive your chat" (Gmail Chat) or "Michael may not have received your message" (Google Talk gadget). Offline messages are sent as regular messages in Gmail, but this is not possible because the conversations between you and Michael are off the record. Michael won't receive your message.
2. Michael is invisible: you won't see any error, but Michael will receive your message.
Michael is "invisible"
Michael is now offline
"Now the only tricky part is finding a user online for once to set chat off the records. This doesn't seem hard as invisible status is still limited to Gmail version of Google Talk and you may be in luck if your friend uses Google Talk desktop clients/gadgets or third party IM client to chat," concludes Rahul. It's important to note that the invisible status is available in Gmail Chat, Google Talk gadget, Google Talk Labs Edition and Google Talk for iPhone, not just in Gmail Chat. Of course, your contact can always disable the "off the record" setting or block you.