All your audio FXs that have the word "dynamics" in their name will have presets that compress the audio they're applied to. That way you can compress the speech track but not the music track if you wish.
However, in the final render, AC3, like Scott said, is an option (if you have it). WMA is another.
Tor

You guys are a big help ... thanks!
Hopefully, the sony vegas movie studio has all you spoke of.

Ahh. You didn't say you were using the little brother. You said you were using VEGAS - there's a big, big difference. Movie Studio *does not* have an AC3 encoder - not sure about WMV.

Aww yes Scott, I just looked and I'm using 4.0 :(
I assume the new 5.0 is the one to get?

LC514, Some clarity please? Compress as in size? Or compress as in dynamic range control?
Movie Studio DOES have Express dynamic controls, just not the ability to create AC3 files which is a file size compression scheme.

What I'll need to do is take the dialog once I'm done with the scenes I'm working on and clean up some of the sound. On one actor the mic settings were a bit to high picking up lots of room tone. Room tone is something I want to add later. I'm new at this and was told I could compress the sound or actually he said I could run it through a compressor and clean it up leaving only the disired dialog. I'm not really clear on what form of compression this falls under.

another question: Is 5.0 superior and offer a lot more? Worth the additional $500?

Compression will generally make room noise seem louder.

I think there is a lesser expensive upgrade from VMS to Vegas 5, isn't there? Only you can answer if it's that much better. Does it do a lot more? Absolutely. Question is, do you need that much more? For instance, you can't clean up the vocals too well in VMS. But you could export that audio to Sound Forge and clean it there, or you can just do it all in Vegas. In VMS, try a blend of noise gate and compression, along with EQ. You might get something happening there. But not likely too satisfactorily. In Vegas, you could use Noise Reduction, along with a number of other tools to get a cleaner sound.
Do you need more than 3 tracks of vid? Do you need plugins? Do you need compositing tools and 3D tools? AC3 encoding? There's a lot more there, but only you can decide what you need. There are a lot of resources available for Vegas, but AFAIK, there is only one learning resource for Movie Studio.

"Room tone is something I want to add later. I'm new at this and was told I could compress the sound or actually he said I could run it through a compressor and clean it up leaving only the disired dialog. I'm not really clear on what form of compression this falls under."

You want Noise Reduction, not compression. Depending on your compression ratio and threshold settings, your result could be EXACTLY NOT what you want! I have used Syntrillium Cool Edit Pro (now GULP Adobe Audition) forever and use their noise reduction alot. It requires you SAMPLE a portion of the audio track that doesnt have any voice over speaking, just the mic open ready to record. Always a good practice to Hit record and allow the mics to record the ambient room a few seconds before you actually record the intended signal onto your track. ANyway, you sample the dead space, set the percentage and APPLY to the entire track if you want. Sometimes AFTER THE FACT of recording, however, even noise reduction doesn't really help especially if it is unusually high "noise" in the room", in which case, perhaps inserting silence between spoken words is about all you can do (short of re-recording the audio if possible). But I havent experienced Sony's Noise Reduction. Beware, noise reduction DOES colorize the final result, use discretion in apply it.

What is AFAIK?

As Far As I Know

Beware, noise reduction DOES colorize the final result, use discretion in apply it.
This is because you use Audition. Try a better Noise Reduction tool, like Sony's. Audition's tool is good for a "freebie" but it's not remotely close to SoundSoap Pro, WAVES, and particularly Sony's app.

Spot,

The way you describe it seems like Vegas now is packaged with NR. Isn't that a separate product still? Which means you can still use it in conjunction with VMS? Or am I missing a "good" deal here?

Noise Reduction can be used in Vegas, because it's a DX plugin. VMS won't accept DX plugs, it's not supportive of DX. (or any other plug architecture)
Noise Reduction is still a separate purchase, unless you buy a bundle deal from one of Sony's vendors/dealers.

The simple way to do this is with the noise gate.
Set the threshold to open just when the actor speaks and close enough to drop the room noise.

If the problem is ambient room noise between the speakers statements you could create a volume envelope on the track, add points between spoken statements and duck the volume down at those points. This won't help ambient room noise while the person is talking, but it will give you more control than using a noise gate. It's time consuming though.