Dolomites or Lugano?

The dolomites are beautiful but it could be a bit of challenge seeing the mountain area without a car.

With the very short time frame, Lugano would probably be a better choice in this case as it's only about an hour from Milan by train. Rather than having to change hotels for one night, you could easily visit there as a day trip. OTOH, it will take 3 - 4 hours to get from Milan to Bolzano, usually with one change Verona Porta Nuova.

Given its past history, the Dolomites are definitely more like Austria and although officially bi-lingual, I found that German is much more prevalent in some areas than Italian (although I found that Italian was spoken more commonly spoken in Bolzano).

The Dolomites are unlike the rest of the Alps in that the mountains are more worn and rugged. The stone they are made of is different as well so they are exceptionally dramatic. I would pick the Dolomites over the Lugano area every time!
If you only have a day you could take an early train to Bolzano. After that you would need to use public buses to get around. It's not difficult and you could easily get up to some of the more beautiful areas, do a little hiking, and then spend the night. The next day you can take the bus back down and catch the train from Bolzano and work your way to Venice.
If you want more flexibility, you can rent a car for the day in Bolzano. You will be able to see a lot more without being limited to the bus schedule. Know that if you are there on the weekend, especially Sunday, the bus service becomes quite limited and infrequent.
The Dolomites are a fantastic mix of Italian and Austrian...most menus offer fare from both cultures and in many places the menus are printed in Italian and German as are many of the signs. If you are closer to Italy, such as Cortina, Italian will be dominant. In the western Dolomites such as Brixen and Castleruth and up towards Austria, German is prevalent.
No matter where you choose to stay, all you have to do is find a gondola or ski lift and the views at the top will blow your mind. I prefer the Marmolata, the lift going up to the Seiser Alm, or the one that goes up to the Sassolungo Group of peaks. Spend a day in any of these and you'll be itching to go back! We have, many times!

Thank you all for your advice. We will not be renting a car if we went to the Dolomites - just because it would be more of a hassle for a short period of time that we would need it. We would be at the Dolomites on a Saturday.

Do you have any hotel recommendations for the "best" view of the Dolomites and easy access to the buses to sight-see?
We want to make sure we take advantage of our short time there to maximize sight-seeing and reduce travel times to get around.
What are the best activities to do in September?

Thanks again :)

The south tirol website has good transport search.

http://www.sii.bz.it/en.

Sexten while further is a great town.Very German influenced.
In Sept. theres 3 buses over to Cortina routed close to the 3 chimneys, fare €7.
Bolzano,comes up with about every 2hours towards Cortina,maybe on that route theres a refugio to spend a night high in the mountains.
Theres a couple of other dolomite/bolzano questions if you do a forum search.

Looks like you got some good advice here. Castelrotto is a good place to see the Dolomites. It would be a short bus ride from Bolzano. Look for train schedules on www.bahn.com.

Castelrotto is not in the Dolomites.
Let's, for once, deviate from Rick Steves' marching orders and visit places that are better.
Val Gardena, Val di Fassa, Val Badia or Val di Fiemme are where you should go to see the best Dolomites.

I'm also wanting to hike and bike in early August, for 2-3 days in the Dolomite area, particularly the Alpe di Siusi area. Want to minimize the amount of time commuting each day to trail heads. Do you all recommend staying in Compatsch or Castelrotto? If in Compatsch, is there a recommended hotel besides the Hotel Seelaus (which is booked during the time I want to visit)

Staying up on Alpe di Siusi is a real treat. The views across the meadows to the peaks is amazing. Try Hotel Icaro or Berghotel Zorzi.

IMHO it is not worth the time to move into the Dolomites area for a single day, that would be spent mostly travelling. You would barely have time for a short afternoon walk and a dinner.