Go get the latest DivX and VirtualDub!
You may also want to run a search for the Lame ACM...
I grab 320 x 240 at 25fps, with a keyframe every 5 frames. This doesn't require more than about a gig and a half (usually less) for a couple of hours because the video stream is compressed on the fly using the Intel Indeo 5 codec set to 80% quality. Sound is sampled at 11,025KHz in 16-bit since this is the quality VHS records and any higher will introduce static. It's in mono because the capture card isn't stereo (I don't consider this a great loss, as many portable TVs only give mono output.) Generally, this produces about a 1.2Gb file from about 100 minutes of video feed.
I'm using a miroVIDEO PCTV card, but any reasonable card should give you the output described above (ie, VHS quality or thereabouts.)
Afterwards, the video is run through VirtualDub to correct any picture quality errors and to compress it down better with a different codec. I'd suggest DivX ;-), but as this is of somewhat dubious legal status, it is possible to use the older Microsoft MPEG-4 codecs (versions 1 & 2, not 3) if you install the Windows Media Tools 4 pack; although some people have more luck with this than others. DivX ;-) and VirtualDub are both just an internet search away, and will fit your gigabyte file onto a single CD, no worries.
Some other simple tips are to defrag your hard drive before capturing, and adjust the brightness / contrast / colour saturation to suit each film (since they're not all the same.) Also, the MPEG-4 decoder can, in Windows Media Player, be set to provide better quality output (if you have a really good processor), or simply to make adjustments to the contrast / brightness / saturation, which is surprisingly useful at times.
There. It isn't hard. Anyone can be doing it.