1) Worms and their castings always wind up in the "basement", in my experience. It doesn't mean anything is wrong; they just like to go down there for some reason. I just scoop everyone and everything out whenever I un-stack the worm factory to harvest the castings from the bottom tray. What I do is to add this very wet glop of worms and castings from the "basement" to the very top of the new bedding in the newly cleaned-out top tray, where it can drain the excess liquid into the new dry bedding and "seed" the new tray with worms and all their companion organisms.

2) Fruit flies won't hurt anything but they are darn annoying to have flying around, especially if you have the worm bin in the house. They will be less of a problem if you always bury fresh food very deep into bedding material. Freezing the scraps before feeding may help kill fruit fly eggs, but it's not a guarantee that the adult flies won't find the bin whenever they come into the house on fruit you just bought. You can also stop feeding for a period of time - fruit flies, unless fungus gnats and some other flying friends, don't want to eat decomposing food after a certain point in the decomposing process.

If there is a persistent problem with fruit flies, or if the fruit flies are mixed with lots of fungus gnats, I recommend swathing the whole worm factory in fine mesh netting - mosquito netting or sheer curtain material, as detailed in this thread: http://forums.gardenweb.com/discussions/3959742/bought-used-wf-360-gnat-infested-help?n=33

Of course if you live in a warmer area you will get more gnats and fruit flies inside. Currently I do not have any of either and it is plenty cold here and my worm factory 360 is inside. The hints already given will help , but if you have a lot of ff you might something than many people use that is a sure magnet for ff. Apple cider vinegar will work on ff. Put some in a dish , add a drip of dish soap cover with plastic wrap poke holes in it and wont get back out. This method will not work for gnats . Its a good idea to place the ACV near your worm bin or where they are seen. Also you can use a cover of newspaper to help deter them from the food scraps.

I have tried vinegar traps so many times for fruit flies, and I've never caught more than one or two flies, if that! This includes times when I've had a worm bin, and other times when I've just had a lot of fruit flies in the house after bringing in a lot of produce. I think I've tried every possible configuration and formulation, and also commercially available traps, but it's just never worked for me - either in Southern California or here on the East Coast.

I did have regular flypaper hanging over my bin when the infestation of gnats + fruit flies was in full swing, and it works to catch a lot of fungus gnats, but fruit flies rarely land on flypaper or other sticky traps. And even though I was throwing away a long flypaper almost completely coated with fungus gnats every week, there always seemed to be more where that came from.

It depends on what you have ff are attracted to the vinegar gnats are not , with those the best thing I use yellow sticky cards.

As an amateur entomologist, I definitely know my fruit flies from my gnats! Even when I've had large numbers of fruit flies inhabiting my kitchen, no amount of vinegar traps have ever done much to catch them. Putting the fruit in the refrigerator, on the other hand, solves the problem rapidly, since the life span of a fruit fly is so short.

WRT gnats, in my experience yellow sticky cards and old-fashioned roll flypaper are about equivalent in gnat-catching ability. The bright yellow color doesn't seem to make a lot of difference; nondescript old-school flypaper does just as well as long as it's hung under a light, and it tends to be cheaper and easier to find.

Do you have the facory with the worm ladder as the 360 that I have does? This allows for the worms that end up in the drain basin to crawl back up into the upper processing tray. Although some will make it back up if it too wet but some will remain and just move those back into the top tray or even just scoop those into my harvest tray and move on.

I think that all Worm Factories now sold come with the "worm ladder" (a plastic flange that fits into the bottom drainage tray) instead of that feature being limited to the Worm Factory 360, but it would depend on when you bought your Worm Factory and whether you bought it new or used. I don't know when they started including the worm ladder in the non-360 models, but mine has it and I bought it new this past March.