Inspect the walls of the garage to determine which are insulated and which are not. In many cases you will find only the walls adjacent to interior rooms of your home are insulated. If this is the case with your project, these walls will need to be insulted in order for the room to be used as a living space.
Insulate the walls as needed. Your best option is to cut a small opening between each of the wall studs and use blow in place insulation. Once the area is properly filled with insulation, patch the holes and paint. An easy way to patch the holes is to cut a piece of drywall 1 inch wider and taller than the hole. Trim away the backing and interior contents of the patch 1/2 inch all the way around the patch, leaving the front liner intake. The patch should now fit into the hole with the front liner overhanging on all sides. Mud this area, sand smooth and paint.
Remove the garage door, mountings and rails. Once the door is remove you will need to construct the new wall the same day--in order to secure your garage. The wall should be constructed using 2 x 4's on 16 inch centers. Align the new frame with the existing wall, being certain it is level and square. Secure the frame in place by nailing or screwing to the two side walls as well as the overhead framework.
Anchor the new wall to the concrete floor by drilling holes through the frame and into the concrete. Insert anchors approximately every 3 to 4 feet to ensure a secure fit. You will also need to seal along the base of the frame with silicone to help prevent pests from entering your home. Insects need only the smallest of cracks to gain entry, while a mouse can squeeze through a hole only slightly larger than a dime.
Install siding on the exterior of the frame, carefully matching the layout of the existing siding. Once the siding is in place add insulation to the wall before installing drywall to the interior side of the new frame. Patch and mud all seams and other damaged areas around the garage. Allow these areas to dry, then sand and paint.
Build interior walls to fit your design elements. You may also install carpet or other flooring over the existing concrete. You should have a licensed electrician complete any rewiring needed to add light fixtures or outlets desired.
Measure and mark the location for any desired windows. If possible allow one edge of the frame to be on an existing wall stud. It is critical you double-check all measurements and make certain this opening is square. After checking for wiring or plumbing fixtures in the wall, cut out the area with a skill saw or saws-all. With the old wall removed, build the new frame using 2 x 4. Secure the window in place and caulk the edges for a weather-tight fit. Frame in the interior as desired to match your interior decor for that area.