The convention is that the quotation should be in standard dialogue margins, separated by a line break and within quotation marks. I suggest, and use, italics as well. Performers (and directors and readers) will appreciate that it stands out a bit from the flow of dialogue, making it clear that they are quoting and helping them make appropriate choices.
Thanks for writing,
Guest Editor Warren Lewis
Warren Lewis’s credits as a screenwriter include Black Rain (Paramount) and The Thirteenth Warrior (Touchstone). He has worked on assignments for most of the major studios, including Sony, Warner Brothers, and Fox, with over thirty original or commissioned screenplays and numerous re-writes. Warren served an old-fashioned New York apprenticeship in film-making, working on film and commercial sets first as an apprentice and assistant film editor, then in production. He attended New York University and graduated from its film division. He’s worked on over 100 commercials and 15 feature films in various production capacities, including second and first assistant director and second unit director on films directed by, among others, Penelope Spheeris and John McTiernan. For more about Warren, visit screenplaystreet.com, the website of his consultancy for aspiring and accomplished screenwriters.P.S. For more on this topic, read Formatting/Punctuation/Grammar, Guest Editors, Screenwriting