Pry off the old wall paneling with a pry bar. Insert the pry bar end into a seam on the wall panel. Lever it toward you to pop the paneling off the nails. Discard the paneling.
Remove any existing wall insulation. Tear out any batted or fill insulation that may be in the wall cavity behind the paneling. Discard this material.
Remove all of the old nails with the back of a hammer. Place these into a bucket as you work.
Dry out the wall cavity. Now that the wood is exposed it will need to be completely dried out. Place a heater in the basement, at least 3 feet away from the wall, and turn it on high. You can use a hair dryer if the wet area is small.
Measure and cut the wall paneling to fit. Wall panels are usually sold in 4-by-8-foot lengths. Measure out how many panels are needed for the wall and make any necessary cuts to the panels with a circular saw.
Replace the insulation. Fit bat insulation into the wall cavities between the studs.
Hang the panels over the wall studs. Hold the panel into place and insert a nail into every stud at a rate of one every 12 inches vertically. Continue until all of the panels are hung.