I just read that Vegas works in 8bit color space as opposed to 10bit, which is what Avid and Premiere Pro use. What does this really mean? How big of a limitation is this and what does it affect?

A Google search on "8 bit vs 10 bit color space" says:
Video formats are either 8-bit per channel or 10-bit per color channel. The 8-bit formats have 256 steps from black to white, and 10-bit has 1024 steps. This extra detail can improve video quality when the source is heavily processed during editing or post-production.

Tape formats like Digital BetaCam are 10 bit so, if you have Vegas and want to edit some of this footage, it is an issue.
There are workarounds ($$$) but, since I don't deal with this issue, I've never paid attention to them.

Fortunately, for most of us, this isn't an issue.

So if I have DVCPROHD 720p footage, do you think it's an issue? Guess not.

Some quick Googling says that the DVCPRO format is only 8 bit so yes, it's not an issue.

will, I think you're mistaken. vegas processes in 10 bit. I/O is all 8-bit.

I probably am mistaken. I just pulled this from the Wikipedia on Vegas. It said:

"Vegas also currently only functions in 8bit colour space with no support for 10bit. This is still a major shortcoming of Vegas in the professional sphere and many Vegas users are hoping new versions of Vegas will move to 10bit support."

I was just curious if this was a shortcoming or not or what it even really means.

Thanks for the googling Mike. I feel better.

the issue will manifest itself when editting in 8 bit. color correction will result in "holes" in the color space thatappear, visually, as color banding, unless sophisticated dithering algorithmns are used to smooth the color mapping. you can easily see this in Photoshop when you edit images in 8-bit, instead of 16 bit. You can also see a representation of what happens when you edit in 8 bit by looking at the histogram in vegas. You'll see these "holes" in the histogram where no color info exists. My understanding is that vegas uses 10-bit processing with dithering algorithms to convert back to 8 bit for image display.