Hi Kimbersue,

If this is going to be a conforming item, you will need to group your dress a bit differently.  When rigging a conforming dress, you should group only the hip into the dress, leaving out the thighs.

Grouping the thighs is what is creating your problem.  The thighs do not weld to each other, so you have to use the hip and add movement bones to account for the thigh movement.

PhilC has a great tutorial on adding the bones: http://philc.net/Body_Handles_the_Video.php