Vegas hates h264
Which version of Vegas? If it's 9 0r 10 then you have the option of RAM preview - select the section of your project that you want to preview, from the tools menu select "create RAM preview" or something like that, then wait for it to create the preview - you'll know - then press the play button for your project. You can change the amount of RAM that Vegas uses from the tools/options menu.
How big is your preview window? If it's biggish then you won't get good quality - use RAM preview instead.
playing through the preview the quality is seriously low (I can put the output to higher quality but it still isn't as good and is once again rubbish during transitions)
Do you mean when you put the preview quality at a better setting (not draft or auto, but good or best) ?
Are these 1080p h264 files?
got to go, but will think about this later