What is the best way to put siding on an older home without causing it to rot?

We recently bought a house that was likely constructed in the 1920's or 30's and we would like to install siding on it.  Currently it is clad in insulbrick and some of it is starting to break down.  The previous owner told us that the walls are constructed of 2x4 studs with no insulation and lumber sheathing on the inside and outside of the wall.  The interior of the walls is lathe and plaster.  The windows were replaced by the previous owner and their frames were left out about 1 7/8" to 2" from the face of the wall in preparation for styrofoam and siding.  The house is located in Eastern Ontario.

From what I have read, we have to be very careful if we are going to try to insulate the walls (ie. with blown-in insulation) and may actually be better to not insulate, leaving them the way they are.  We have also considered installing 1" of styrofoam insulation before the siding.  I certainly don't want to do something incorrectly that will cause the walls to rot from the inside out.  I am wondering about the following:

- should we blow insulation into the wall cavity?

- should we install an air barrier on the wall before we side it?

- should we remove the insulbrick?

- should we install styrofoam?  If so, what type?

- should we strap the wall before siding it (with or without the styrofoam)?

- should we leave an air gap (either behind the siding, behind the styrofoam or both)?

From what I have read, we are probably best to leave the insulbrick on, strap it with 1"x3" lumber, mount the siding to the strapping and don't bother insulating at all.  I don't want to create a situation where moisture gets trapped in the wall and causes it to rot but I don't want to waste any more energy for heating than I have to. What are your thoughts?

Thanks,

Richard