I just got a new Sony DVD301 for the ol' lady for Christmas and have done a lot of research on this. Movie Factory, I don't know.... I tried this and it kept giving me AC3 sound issues/errors (MovieFactory Disc Creator 3). I could use it successfully for video, but i would end up with no sound.
I then tried the TMPGEne software and it works like a charm. You can bypass that Winblows software and use this directly. I would highly recommend you don't bother using the USB from the camera to your PC. For 2 reasons: 1: You're over using the DVD drive on the camera, thus it'll wear out quicker (one of the first things to go on that camcorder). 2: It's slower.
Pop the mini DVD out of your camera and into your DVD reader in your PC and use TMPGEne to read the disc. It's going to be slow no matter what you use because you have to read all 1.2 gig from your mini dvd, but this is much faster than going from the camcorder via USB..i think.. at any rate, you're saving your laser/dvd player on the camcorder. I just did this 2 days ago and had no problems whatsoever bringing in the video from both sides of my double sided mini disc. I then added a 3rd recorded mini disc to get me up around 3.5 gig. I did a little menu stuff and exported it to a folder. Used nero to burn to a full size dvd-r. I played it in my sony dvd player and all looked/played well, with sound.
From what I recall w/ moviefactory, I kept getting AC3 errors and after doing a lot of reading, people recommended ripping the sound out and turning it into an mp3 or wav file, then importing it back in to the DVD. It sounded like too much of a hassel for me. TMPGEne does exactly what you need it to do. Maybe moviefactory disc creator 3 will do it too (it was recommended), but I couldn't get it to work w/ the sound. Moviefactory 2 FAQs states it doesn't support AC3 sound files (which is what is created on the Sony dvd camcorder). Also, don't get fooled into thinking that you're creating an actual DVD on this camcorder. I don't think you are fooled though by your posting. It's an mpeg2 image, thus the problems with the sound. You can actually rip the files from the disc and they'll look just like dvd files with bup and vob files, but you can't burn those... it just doesn't work. you gotta rip the image from the disc (mpeg) and use a prgm such as TMPGEne that will pull the AC3 sound out as well.
Like I said, I tried this w/ both MovieFactory 3 and TMPGEne. MF 3 gave me AC3 errors. TMPGEne worked flawlessly, with multiple mini dvd discs. Burned all 3 discs to one full size DVD and it worked perfecctly.