With a lot of assistance by some experts on a video bulletin board I have the process now. First one must not edit Mpeg files in Video Factory. Use the Avi format that you captured with and capture at a television multiple, either 320 x 240 or 640 x 480. So the process goes like this:

1. Capture using Virtualdub. I use CQ=100 for the best quality but it takes longer.
2. Filter using Virtualdub. I use:
Temporal Smooter setting = 6
Smart Smoother seeting 7/40 no interleaving (Mpeg2 does not require any interleaving settings)
Dynamic Noise Reduction seeting = 6
Smart Smoother again at 5/8 and no interleaving (cleans up any remaining pixels)
3. Use Video Factory to edit the .avi file. Do not convert to mpeg until after all editing is done.
4. Save from Video Factory as an .avi file. The only resolution available seems to be 352 x 240
5. Convert to MPEG2 with TMPenc. Be sure that you choose the setting that fills the image out to the borders and not the one that pads with black pixels or you will get a vertically letterboxed video.
6. Burn to SVCD using Nero Burning Rom

That's it. Only about 12 hours work to figure out how to burn a 4 minute video clip. Next ones should be much easier though.