I have not imported this into Encore CS5 to see if there is an issue there, and I have not tried to burn this yet. I am not sure if this is simply a previewing issue which will be resolved when the actual disk is created, or if there will be an issue there as well.
Because you're using MPEG-4 as your source footage. It requires a lot of horsepower to decode and apply a transition on the fly; a less processor-intensive codec/format would probably not exhibit this on your system, so either convert to a different format or upgrade your computer... or render previews.
On your Timeline, when you have done your Cuts and then added the Transitions, is there now a red line above that part of the Clip?
If so, hit Enter to Render the Timeline, or a part of it, limited by the WAB (Work Area Bar), and now try playback.
Colin is correct that the H.264 material does take a lot of horsepower to decode.
I would agree with the others. The symptoms you describe are normally the result of the computer just not having enough horsepower to play back the transition in real time. This can be safely ignored while editing, or you can render the sequence to see it smoothly.
This is the same problem people were having with same-clip AVCHD transitions. We improved the performance in 5.0.2, but as the others have mentioned, more horsepower will help.
It should be OK if you render.
what type of video card do you have?
Also you say you have "150GB on hard drive" Also how big is your hard drive ?
Does that mean you only have one drive ?
You really need more than one drive to spread out the workload.