Alternative Wallcovering
How to 'wallpaper' your wall with fabric and starch.
Staple Fabric & Batting to walls - this is a great idea if you have really rough walls that would just be too much work to repair.

~ Whitewashing your dark wood paneling - It takes a bit of work, but not as much as removing the paneling and replacing it.
~ Six ideas for painting your paneling.
~ Paneling is great for wainscoting. It is more durable than drywall & you can trim it out with chair rail and/or wall border at the top, and nice trim at the bottom as well.