In the past, many homes were built with unfinished basements and the homeowner used those dark, bare, usually damp spaces for storage, laundry, or large collections of spider webs and dust bunnies. You may have bought one yourself and now, with the high price of new housing, you are looking to expand your current house to meet your family’s needs (do your covenants really allow 10 story ranch houses?). That unfinished basement seems be the answer!

Want to do it yourself? I suggest you begin by evicting the dust bunnies! Next, we need to finish the basement walls. Easy, right? Just slap up some drywall and tape! Wrong. Here’s how to do it correctly:

1. Look at the amount of moisture in your basement. Are the walls moist? Are there mushrooms growing in the corner? Is there standing water in any part of the area? (If you make the kids wear lifejackets when they go downstairs, you may have a water problem). You should call a professional for ideas on how to get rid of water seepage. It will be money well spent and will prevent many problems later.
2. Estimate the amount of drywall and furring strips (long, thin wood strips which enable you to attach the drywall to the concrete face) you will need. For every 4 feet of wall, you will need one sheet of drywall (we are assuming that your ceiling is less than 8 feet!) and 4 furring strips.
3. Screw the furring strips to the wall leaving a space of approximately � inch from the bottom of the strip to the floor in case water seeps in. Make sure the strips are plumb (use your handy-dandy level) and drill holes about 16 inches apart into the wall (use a masonry bit). Drive in hardened concrete screws with your even-handier-dandy drill.

4. Shim the furring strips to create a flat plane for the dry wall. (Is this the point where the author makes a bad pun about doing the shimmy?) Start with the strip nearest the corner and use a long level to see if it’s plumb. Use a shim, if needed, to bring it level. Repeat the process to make certain all the strips are plumb with the first.
5. Add insulation and a vapor barrier. Both are available at your local home improvement store. Placing insulation panels between the strips increases the R-value of the basement. The R-value measures the basement’s resistance to heat loss. All you have to do is cut the insulation panel to size and press it between the strips. The plastic vapor barrier will help minimize moisture penetration. Staple the barrier to the strips, but try not to get overly enthusiastic with the stapler and breaking the surface of the barrier. The more holes are in the barrier, the more moisture will penetrate.
6. Cut the drywall. Drywall should also be placed � in off the floor in case the floor gets wet. Use a straightedge or a T-square to mark the cut line on the drywall face. If you don’t have a straightedge or a T-square, use the edge of a furring strip. Drywall is easy to cut using a utility knife. Just cut through the paper facing. The piece to be cut off is then snapped toward the back of the panel. You can then cut through the paper backing with the utility knife. Easy, huh?

7. Screw the drywall to the furring strips. The best way to measure where you need to screw is to snap a chalk line along the drywall at each furring strip (do you remember how far apart you placed them?) Use 1 � inch drywall screws and be careful not to screw so deep that you break the surface of the face paper.
8. Finishing the wall. Ok, now for a bit of artistry! You can make the wall look really good – or really, really bad! Apply a layer of drywall compound in the cracks between the dry wall sheets. The layer should be about 3 inches wide, more or less. Then apply a strip of drywall tape and apply another thin layer of compound over the tape. Then fill in all the screw holes with compound. Try to make the surface and smooth as possible (easier said than done!). After the first layer dries (usually 24-36 hours,) scrape off any uneven ridges or lumps and apply a thin layer of compound with a wide putty knife. Sand smooth and you are ready paint!

You now have a blank palette ready for a wide range of decorating options: bedroom, play room, den, family room, game room, bonus room, office, gym, workshop or bowling alley. The choice is yours! The style is yours! Have fun!

Source:  http://www.designingonline.com/services/home-improvement/finishing-your-basement-walls.html