The concrete wall is 4ft & about 5ins wider than the knee wall (with a window).The question is can I stud out the knee wall to meet the edge of the concrete wall & put basement wall insulation( slotted for 1in by 3in strapping) 1&1/2in (R5.5) ,4ft by 8ft right on the concrete & all the way up on the knee wall to the floor joist , thus making a straight wall ,I will seal everything tight & put the vapour barrier over the entire wall, Will this be O.K. or will there be a problem with the air space inside the knee wall ; also, should there be plastic on the concrete before I put the styro on ? I figure if the styro is taped & sealed tight with plastic vapour barrier the air space would not cause a problem.. THANK-YOU.

I would use spray adhesive to adhere an insulation that doesn't break down with the use of spray adhesive, I don't know if foam has this property.

Yes,you can extend the knee wall out,the space between the existing and new,as long as the air is trapped, is ideal insulation, trapped air is the best insulator there is.(see thermo-pane windows)

If you are going to finish the walls,you will have to install studs to support the drywall/paneling,etc.

Depending on how much space you want to use,you can use 2X4's and make a real stud wall,Kraft faced insulation,and vapor barrier ,then drywall,etc.This would make the window well deep,but it would allow for a nice shelf at the window height as well.

Just an idea.