I use "Compressed AVI" and then choose the Cinepak codec. That's only because it's first in the list - I've never bothered to experiment to see if any codecs are better than others.
Theoretically, the Indeo 4 and 5 codecs should be better than the Cinepak, but I've never experimented with them. Avoid Microsoft Video 1 - it's an antique! The only way I can think of to determine which is best is to try them - create the same title with different codecs, produce a DVD with all of them and see if you can tell the difference.
Interlacing is where the odd numbered scan lines are displayed and then the even numbers. This is the way conventional CRT TVs display the picture. Non interlaced means the scan lines are displayed in order. Selecting one or the other isn't an option if you've selected a codec.