I'll disagree with that assessment, based on my personal experience. There's a definite improvement in quality with 2-pass encoding IF you at "lower" bitrates (by lower I mean under 2500-3000kbps).
You can achieve quality as good or better than the AppleTV preset (2500kbps) at 1700kbps with 2-pass. The new 'turbo first pass' option on Handbrake cuts the time for the extra pass that I think it's hard NOT to justify doing it.
Just for some numbers, a quick test I did with a 2.4ghz iMac had the first pass run at about 90fps and the second at about 30fps. You add about 33% to the encode time, in exchange for better quality and/or smaller size.
For the OP, you cna get 800mb movies, but they won't be DVD quality. You'll lose some resolution, and have a little bit of macroblocking, etc, but it'll be good. Try 2-pass h264 at 720 by xxx (whatever the correct aspect ratio for the movie is) with an 800mb target size first and if that doesn't look good to you, try it at 640 or so by xxx and see how that looks (a lot of times the scaler in your playback device or TV will do a good enough job with lower res files that the extra data per pixel turns out looking better).
For the record, I'm encoding my movie library at 853 by xxx at 1500-2000kbps depending on the movie, and they're roughly 1gb (for shorter, lower bitrate films) to 2gb (for longer and/or higher bitrates). That was about as small as I found acceptable, but I was testing them on a 853*480 98" projector screen, so your results may vary.