Yeah - that is a good question.
I have also been using VMS and Full Vegas since version 3 or 4 (now it is 7.xx) and the reason that I have not tried to help is that this CD-extracting feature works each and every time I use it and from any of my attached CD readers...
So as this does not seem to work on your machine then maybe the CD reader(s) needs a driver upgrade? or un- and reinstall??
If you are working on a project and urgently need to get some music from good CD's then maybe you could just rip the CD with Windows Media player into a directory and then drag and drop the tracks from there into the time line?
I know this is nothing - but hope it may help you anyway :-)

all up to date. I wonder if having 2 different versions of video factory installed is causing problem.

No that should not cause any problems - I have also plenty of VMS and Vegas versions on my PC and use them in parallel.
Actually all VMS does is just to look in Windows CD reader table and from there it makes the list so that you can choose from which you want to extract.
If VMS hangs doing this it must be because it finds something unexpected.
I can not say if later versions of VMS have been changed so that they do not choke in such unexpected things - but having started myself several years ago with Video Factory 3 and now having upgraded step by step regularly every year to now VMS 7 and Vegas 7 - I must say that it is incredible how many good and usefull features Sony have put into the current programs - so I would suggest that you upgrade also.

You will get all the new and usefull features and also the CD problem might have disappeared. An upgrade from Sony to i.e. VMS +DVD is only 39.95 $ and the Platinum is only 10 bucks more - and it is worth each and every cent of it :-)