We had to water-seal ours and patch leaks for a long time. Then we put up studs and insulation and hung sheet rock. On the floor, we used a floating board panel system that is designed for basements and garages. Over that we installed short carpet (I think it's called indoor/outdoor).<br />
It functions very well and looks great.
My dad is a carpenter and I asked him this. He says anything that is water proof and mold and mildew proof. Like water proof wood or walls that can be wiped down. Never lay carpet in your basement it will hold to many of these mold spores. Try linolium or basement paint. Carpets that can be rooled up and washed are okay.
Basements smell damp no matter what. I'm not a big basement guy. Kids who sleep in basements develop asthma from that cold wet air. I don't even like to store stuff in the basement, unless it is really well sealed up. A laundry room, on the other hand, is a great use of a basement, and you don't even have to finish the walls.