One option to consider is simply painting over the paneling.  Painting paneled walls is not much different than painting unpaneled walls, but there are a few specialized steps that can be taken to ensure the highest quality results.

First, wash the walls thoroughly using a solution of dish detergent and water.  Paneling, especially if dark, may hide more dirt and oil than painted walls, so this step is particularly important.  Allow the walls to dry completely before continuing.  Next, consider whether the grooves in the paneled walls will compliment your decorating scheme.  If not, you can use spackle or drywall to fill them in.  Sand for a smooth finish, or leave un-sanded for additional texture.

Before you prime the walls, sand all over lightly with a 220 grit sandpaper.  This helps the primer and paint adhere to the wall.  Use a stain-blocking primer, and allow to dry for 24 hours, and finish with an interior latex paint in the color of your choice.