I too use Ulead Movie Factory (v2.0) and have had very acceptable results from this software.
On an initial look then frankly you should get very good results from a 7000 Kbit stream. I use 6000 kbits (Variable) and get excellent results.
There can be many reasons for the blocky video result. One thing worth noting is Movie Factory (v2.0 and earlier) does not import native MPEG. It actually converts DV Encoder Type 1 (AVI) on the fly. What this means is that if your system specification is fairly low, or you are using just a single disk for capture, or your disk is seriously defragmented etc etc and your capture is fairly large (in other words if your system is not in tip top shape) the blocky results are a disctinct possibility.
Personally I always capture in native format and use a seperate tool (Either my editing software or a seperate encoder) to create the DVD Mpeg compatible fiel. I simply find I get better results this way (incidentally I do this on a fairly low spec PC).
Might be worth trying capturing the native format and post convert. Try this with a short peice of film in the first instance and then check the results.
Also is the blockyness occurring before you burn or after. I have noticed blockieness on some DVD Players that don't fully support DVD-R or DVDR.