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Default New Drywall on Cinder Blocks with 1x2s?

My below-grade basement cinderblock wall had 4x8 sheets of grooved
paneling on it which we had painted white. The paneling was nailed to
1x2 furring strips. But water got in months ago and I finally torn the
old paneling down. The mold, rot, and stench was far worse than I
expected. I found the above-ground source of water and fixed that
problem.

I will "paint" the wall with 2 coats of Dry Lok to keep future moisture
out. 2 questions...

--If I choose to take the entire room down and install drywall instead
of just replacing the sections of paneling, can I put DW over new 1x2
furring strips on cinder block? Are there drywall screws that short???

--If I'm concerned about moisture and use Dry Lok, how should I hang
the 1x2s? Won't cement nails break the Dry Lok barrier? Should I use
construction adhesive instead?

Thanks!!!!!!

JB