Thanks for all your suggestions. I think this is what I'm going to do: 1) 2" XPE in stud bays of exterior wall and joist band. 1.1) R13 to fill the remaining space in the exterior stud bays and joist band. 2) 2" XPE on all concrete walls 3) expanding foam along all edges and cracks. The housewrap isn't doing a very good job of preventing air infiltration on this wall right now. 4 option A) 2x4 wall only half-way up, leave a ledge, and insulate with R13 (3 1/2") fiberglass bat in exterior stud bays (upper) and 2x4 interior (lower) wall. 4 option B) 2x4 wall straight up, R13 in interior wall, blow-in cellulose for the big void between interior and exterior walls. Retain cellulose with netting or block it in with additional XPE. 5) I also plan to insulate the space between the floor joists with batt insulation. DickRNH--you mention putting in a vapor barrier from the top of the 2x4 wall to the top of the exterior 2x6 wall. Can you help me understand which direction it is intended to block water vapor? worthy--funny you should mention leaks from foundation cracks. I was in the basement yesterday and noticed a draft coming through the *concrete*. Upon closer inspection, I noticed a (thankfully just a shrinkage) crack in the foundation wall, with air blowing through it. And it has allowed water through in the past, as I found a small spot of mold on the concrete near the floor. I'll be fixing that before making any more progress on the insulation, methinks :) I think by the time I'm done I'll be able to write a book about all the things that were wrong in this basement.

Several years ago I had my circa 1870 rock cellar walls sprayed with gunite concrete on the inside. The contracter also put down a layer (4-6") of gunite on a small remaining section of dirt floor. The difference in the cellar moisture level after covering such a small space was hard to believe. Anything you can do to prevent moisture migration from the dirt to the cellar will help. Six mil plastic would work but would have to be lapped up onto the foundation walls and sealed with roofing cement or something similar. A similar lapping and sealing would be needed against the wooden walls, but here a product like Ice and Water Shield lapped down over the plastic would probably be better. I think I'd also want to check the wood walls carefully for rot in this kind of environment before doing anything with them.

Another option might simply be to get rid of the bayed portion of the breakfast nook. Square it off level with the two posts on opposite walls. And then, perhaps, construct a bookshelf across the width of the nook, facing the sunroom. You could place a bench for seating on the kitchen side of it. It would eliminate the need for a railing, preserve the idea of a nook for the kitchen, and provide a functional barrier (book case) between the rooms without ruining the view.

For what it's worth, the little concrete pad landing pad outside that door is pitched away from that corner in both directions. But unfortunately chipmunks have managed to get into that corner (they are no longer with us) and there is no longer concrete directly under that rotted 2x4... I can stick a screwdriver down into dirt. I won't really know exactly what's going on there until I pull the door. The rest of the wall on the other side of the door is just a 2x4 wall with an untreated sill plate on-slab and it looks good as new from 1960. Just this corner is a mess.