The selection is not a Compound Shape.
I assume you are using CS 4 or CS 5 in which case your pathfinder command is automatically expanded unless you apply command while holding down the Option key.
I believe in CS 3 it is the opposite and before CS 3 it was the way6 it is now.
The reason for htis was that everyone complained that they expected the Command to be a finalized command and not a live effect.
So if you wish to make it a compound shape rather than a simple path or group of paths hold the Option Key down when applying the Pathfinder command of your choosing and then you will be able to expand it.
Otherwise you automatically expand the command when applying it.
I am trying to use the blend tool. I am taking classes from somewhere and the teacher there told us to expand the objects first and then use the blend tool. He has CS3 over there. I am using CS4, and I am trying to get a step blend and not a smooth blend on my objects. But the step blend is not working. So I thought maybe I had to expand.
Image is not pasting. I don't know why.
(Use the camera icon to include an image - sometimes the crappy forum software won't let you the first time.)
If you are using the pathfinder in CS4 or 5 (or 6 I assume) the default behavior of the pathfinder panel is to expand your pathfinder actions. With CS3 and previous, it would leave them as compound objects that, in your example, you'd want to expand.
If you want the pleasure of clicking the Expand button, alt(option) click the pathfinder button and it will keep it live. (the old behavior was the opposite and alt/option clicking would expand)