Thank you all for the suggestions on what to do with the dress. I'm going to try and distress it this evening, but it isn't a natural fiber so it may not work. When I've stamped on velvet in the past it has been rayon or silk velvet (and by the way, it looked beautiful).
As noted, I have nothing to lose since this dress is unwearable as is. If the fabric distressing doesn't work out this evening I'll stop at Joann's and see if they have a decent selection of knits and sew another one. As Sally noted, at some point trying to fix it will take more time than just sewing another one :-) Then I can use Lori's suggestion of cutting it off and wearing it as a top in the future.
I love the Internet! If I would have asked this question of my co-workers they all would have looked at me with blank stares. You all know what I mean don't you *LOL*
I'll keep you posted on the continuing adventure of the great knit dress and the cr*appy fabric.