Pound the nail heads into the wall as far as they will go, using a hammer. Try to work them into the walls so they are flush with the surface or slightly indented.
Mix joint compound according to the package instructions. Usually you add 4 ounces water to 2 gallons of joint compound in a 5 gallon bucket. Stir with a rotary mixer attachment in a drill; stir until the joint compound is smooth as cake frosting.
Scoop some of the joint compound onto a putty knife and smear it over the nail head. Scrape the blade of the putty knife across the surface so the compound is flush with the surface. Allow the compound to dry for 24 hours.
Spoon 1 tbsp. of drywall adhesive onto the back of drywall board using a putty knife. Place the adhesive in 1-foot increments across the board.
Add cornice cement to the back of the board. Apply 6 spoonfuls of the adhesive equally around the board.
Press the adhesive side of the board against the foundation walls so that it is level.
Drive masonry nails into the wall to hold the board in place. Remove the nails once the adhesives have set -- at least 24 hours later.
Prime the drywall boards with drywall primer using a sponge roller and bristle paintbrush. Allow the primer to cure at least 4 hours. Apply a second coat.
Paint the walls with water-based paint using a sponge roller and bristle brush. Allow the paint to cure according to the manufacturer's instructions. Apply a second coat of paint.