Start by washing the paneling with a solution of tri-sodium phosphate (TSP). This solution gets into the grooves and leaves the wall a bit tacky. Do not rinse.
Hang heavyweight wallpaper. It's available at most paint stores. Hang this underlying wallpaper horizontally, not vertically. You'll see the paneling grooves disappear.
Next, apply textured wallpaper that is made to be painted. You can buy this in various textures, like pebble or fresco.
Finally, after the wallpaper is completely dry, paint your walls any color you'd like!See Demonstration