Insulation, Radiant and Vapor Barriers - finished basement insulation/vapour

Just a couple of questions about finishing a room in my basement.
I'm framing and insulating a wall against the foundation and I have heard many different things.
should I put a poly-sheet right on the foundation, if so why and I have heard about leaving a 1 inch space between the foundation and my framed wall. what is the purpose of this and if I have previous water damage to the plywood siding of my house, how important is it that I replace that plywood or will it be okay if I have solved the water problem. I'm concerned about cost of fixing the plywood siding.

For up there Id check code first.
should I put a poly-sheet right on the foundation We do all the time. so no moisture can get to the insulation from the cement

I have heard about leaving a 1 inch space between the foundation and my framed wall. For just air.

if I have previous water damage to the plywood siding of my house, how important is it that I replace that plywood or will it be okay if I have solved the water problem.

Its in do you have any mold there in the wood now. Are is it all clean now?

ED ;)

as far as the plywood replacement is concerned, after looking into it further, found out is was carpenter ants that did the damage so now I am faced with replacing it. So here is another question about it, to cut away a 4x4 ft. square in the side of my house just under the floor joists the would run parallell to the wall, do I need to support the floor above before I cut away the side of my house? if so can I just strap some 2x4's to the nearest floor joists and run them down to the floor? Will this be enough support, turns out I'm on my own if I want this job done before 2008!

???? Dont the floor joist there set on top of the sill plate. Right on top of the concrete basement wall??? There also should be a belt boardthere that all the joist are nailed to ??? ED;)