Sony's Vegas 7 states that it edits XDCam "natively". Is that a good thing or would it be better to edit with an intermediate codec (i.e., Apple's ProRes422, Cineform's Aspect or Prospect, etc...)?

Using the XDCam Explorer you will be editing proxy files. When you are finished with the edit you "conform" the proxies to the HD files.

Jim

You don't have to edit the proxies. On a reasonably fast machine, you'll have no difficulty editing the master files, but proxies are very handy, and they look great.
Editing a four hour piece even as I type, but working with the master files for SDI output and accurate view/color correction.

Will Vegas degrade the quality of the Master Files...say like if you do any color correcting, compositing, titles etc...?

Any time you alter the original structure of the file, it would be considered "degraded." Whether it is visually or even electronically demonstrable is another question.
Whether you damage the integrity of the file to a point where it is poor visually depends on what you do. Pushing saturation too far, will result in a poor image.
With that silliness/obviousness aside, you'll not find any issues with how Vegas manages the XDCAM files during color correction, etc.