You explained it very well. What you have is a catilevered floor.
Puting insulation on the outside isn't likely to do much, unless it covers any openings between the boards. I would remove the boards and insulate it properly. Use craft faced insulation, making sure the paper is facing up toward the floor, the exposed fiberglass facing down toward the exterior of the floor. This will help a little toward providing a vapor barrier. You'll probably get R-19 for this. You can add more "unfaced" insulation under the R19 to get probaby up to an R-30 value. But don't try to fit more than there is room for. Packing it tight or crushing it will loose the insuating properties.
I don't see anything wrong with reinstalling the old boards. But if they are damaged during removal and not re-useable, it's easier to replace it with exterior grade plywood.
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Last edited by ToolGuy; 01-21-2008 at 04:20 PM.