You'll have to activate a hidden feature in WinRAR 3.0. It's called "Ultra Relentless Hardcore Compression". With this you can zip that image even down to the size of a usual 3.5" Floppy Disc. The only problem is, that it takes around three weeks of encoding-time and it's really unstable (that's why they've hidden the option). Usually the file destroys itself within 10 days...
Hmm, guess I've drunk too much last night
Of course I was just kidding. I think 500 MB might be the best what you can get. It always depends on the data you have. Common user data can be compressed to around half of its size (I guess), movie sequenzes can't be compressed at all (or absolutely minimal). I tried to zip "Evangelion" for the Saturn few years back. It contained only video-sequenzes, and after three hours of compressing the file was down from 700 MB to 699 MB.
I suppose you've found some games on the net that where around 200 MB and after unraring them they were around 700 MB. And now you want to know how they do that.
BUT the actual user date of such a game IS only around 300 MB. The rest is Dummy-Data (just zeros). In Dreamcast games you use Dummys to put the game data to the outside of the disc. That means many images contain (in those 700 MB) let's say 300 MB of game data AND a dummy-file of 400 MB.
When compressed, the dummy takes close to no space at all, that's what makes the compressed Image so small.
But if you have 700 MB of pure game date, I think you can't compress it below 500 MB of size.