Before this basement forum was here, there have been several posts the short time i have been reading these forums about code issues when finishing off a basement.I dont want to lead you astray with the above advise, as my suggestion might be a violation.You should run this by your local bldg. dept for what is the happening way to finish your basement.Simply applying drywall over the existing paneling might be a violation, as well.The posts i read concerning this topic generally involved an air space between the finished wall and the foundation. Some air spaces were as little as 1/2", with others as much as an 1-1/2". The codes obviously differ in different parts of the country. You might have to go to the expense of having a framed wall held out from your foundation. This would be a typical framing involving a pressure treated sill plate, studding 16"o.c, and either one or two upper plates depending on your codes.The advantage to this is you would get a signifigant more r-value in your walls compared to foam board or the paneling(?).The disadvantage is you lose a little sq. footage of floor space, though i doubt you would really miss that.There are also drainage concerns if you are in a wet climate area, as well as proper vapor barrier installation if required in your area. I would go down and ask all of these as questions to your local bldg. dept.If you go ahead with what you currently have planned, might give you some problems as far as moisture is concerned and could come back to bite you if you go to sell if it's a code violation.

Not sure exactly what you mean..did you cover the floors and you are having difficulty removing the drywall dust, or are there visble scratches on the floors? 8 months of remodeling I have to say that dry wall dust is the worst...it gets everywhere and it doesn't take much. I've have found is very difficult to remove it on wood floors either by sweeping, vacumming or a microfiber mop. I used Bona wood floor cleaner and hand cleaned our floors... For the areas where scrathes exist on a small scale our hardwood floor contractor was able to fix these areas so well you can't tell.

Thank you everyone. I'll make a general reply to everyone. The damaged areas have all been drywalled, taped, textured and primed, but I'm still struggling with paint colors in that area so we've been painting bedrooms instead. (whole house reno.). Basically, all the drywall was done and over. Some of the damaged areas were on walls with a flat texture (i.e. no texture) and some on walls with a sprayed orange peel. I wouldn't feel comfortable patching either kinds of texture myself. If you patch an orange peel area, how do you get the texture back on the flat patch you just did? Our painting company is called Breezy DH, Inc. We're DIYing where we can, and wall and ceiling paint is certainly doable. No painters fixing holes. :( We did decide to have our trim and doors professionally caulked, sanded, and sprayed as it would take DH many months to do that painstaking, detailed work with his schedule. I am the GC so it does fall to me to take care of this. I finally heard back from the flooring company. My rep will be stopping by in the morning to take a look at the walls. He did give me some slight bs about damage below the trim, but agreed that there shouldn't be damage above. Accidents happen, but I know they were moving very fast and didn't seem that careful when I watched them several times during the first two days. I will not have the floor installers do the repairs. Didn't fall off the turnip truck yesterday. :)

@DavidR - not "irresponsible", most likely correct, we are 3rd owners and bought the home when it was ~12 years old. . .the wainscoting looks very good with the Stickley cherry set, we're "updating". . . The baseboard is 2 1/4 inch hemlock, it looks shorter because of camera angle, this photo is in another room where we've used it. We had drywall repair/texturing done after pulling wallpaper and wainscoting in nook (and kitchen), unfortunately drywall/texturing/etc. is not our bailiwick. Husband is most concerned about nailing into drywall to hold curved wood to wall, I would assume glue would help. A thin piece of shimmed wood between molding and drywall also? Thanks again everyone for your comments! Even if we don't apply it here, ideas and information are part of the educational process.