We are stripping away at our "finished basement" in order to reshape it and refinish it. Upon pulling off the wood paneling, we discovered 1" furring strips nailed directly to the exterior cement block wall.

We want to waterproof the walls with Extreme Drylok.

We are torn between two options:

1. Keep furring strips applied to the wall, waterproof walls and strips with Drylok product, cut and apply 1/2" foam board insulation between strips and apply drywall.

2. Remove furring strips, repair every single nail hole with cement patch before applying Drylok, apply foam board insulation (likely thicker than 1/2"), and build 2x4 frame.

I'd love feedback on these two options. Is there a better option to waterproof, insulate, and frame exterior walls?

Obviously, we are leaning toward Option 1 to reduce the cost and labor, but we are left with questioning:

Is the Drylok product on the wood and cement effective waterproofing?

Is 1/2" foam board sufficient insulation?

Thank you in advance!