First off I live in the Mixed Humidity portion of Virginia and I am building an underground basement as we speak. Since Virginia is roughly on the same Latitude as Kansas I will answer. Don't know how long your basement walls had time to DRY out before you painted them, but I would have thought at least a years time since you built/acquire the house. (Builder friends of mine recommend that concrete (poured or block) be allowed to sit for 1 year before painting it; concrete takes a long time to cure; especially underground and with moisture present block walls attract it like a magnet; even if they are grouted!) 2nd,How was house waterproofed outside? How thick is the coating ? Did you do it or a builder? Does it have Insulation on Exterior wall? How thick is it? Or is it just a slab with no vapor barrier or Insulation on EXTERIOR wall ? 3rd I would recommend Green Board to be installed in the basement if you don't know the answer to the 2 questions above.... That way if you walls sweat ; even a little bit you will have moisture resistant Gypsum Board already in place. Good Luck.

Thanks again, But if I may, I would like a little more clarification on this. First of all, although I realize all basements are going to have some moisture issues, relatively speaking, I have a very dry basement. So, from your last statement, if I attached 1" of XPS to the lower half of the wall (the cement block part) and built my new stud wall on top of that, I could confidently fill the remaining gaps with batt insulation to the ceiling? But, from what I've read in the building science articles, I should NOT put a vapour barrier on top of the insulation to allow for inward drying, unless it is MemBrain? I have no problems with this, it just seems counterintuitive. What happens at the top half of the wall (wood stud) that is built on top of the block wall above grade? It is brick veneer on the exterior if that matters.

Additional questions/comments: I live in the metro Washington, DC area. Worst winter temps typically in Jan/Feb for 1-2 weeks at a time around 10-15 degrees F with wind chill. Hot, humid summers. Our house is a block and brick home built in the early '60s. Currently basement is unfinished - we can see the concrete block walls. Three (almost) sides of basement under ground, fourth side is walk-out. Currently basement not framed. Understand this needs to be done prior to insulation, along with electrical and any additional plumbing we may need. Correct? Am looking to insulate the walls. First quote is for R-21 faced insulation (Owens Corning). Is this good/too high/low R-value? We have a geothermal HVAC, which heats/cools the basement and 1st floor and it cannot keep up on coldest days (<25 degrees F). Also thinking of insulating ceilings. Sound-proofing would be a nice extra. A good idea? Can see wood sub-floor currently, with copper pipes and HVAC. Quote is for R-30 Owens Corning Batts Insulation. Good or other recommendation? Thanks so much :-)

If the carpet is soaked, then I would say a lot of the smell is from the carpet. I highly recommend you remove the carpet and then implement a 'wait and see' approach. If the carpet was 'soaked' I worry that the WALLS have been infected with mold. Anything that got wet will be suspect. That means drywall, studs, etc. Once you remove the carpet, you will be able to see/test for moisture around the edges of the wall. Damaged drywall is easy to figure out. It will be significantly weaker than unaffected areas. It it is damaged you should be able to push a pencil through it. If it is in tact the pencil won't do anything but make a mark. The structure BEHIND the drywall will be the problem child. The musty smell is the indicator that the infection is there. Where the infection has taken hold (carpet, drywall, studs, etc) is to be determined. You will need to have a REALLY good look at what became infected before installing new flooring. This project could be a bit more than you thought. I would talk with your bank to see how much financial backing you can access should this project fall into the 'worst case scenario'. I would also ask the company that is dealing with your moisture system what is the most common flooring they see when they install their product. They will be able to tell you 'easiest' type of flooring they deal with. They will also tell you the biggest PITA they deal with as well. But while you wait for decisions on carpet, etc, please check with your bank to ensure you have access to funds should this project to south.