We get many questions on our radio show about the mysteries of removing paneling. The answers depend on the condition of the wall as well as how the paneling was installed. If the paneling was nailed on, you may be able to remove it with little damage to the wall. But if it was glued in place on drywall, the paper face of the drywall will most likely be ripped off in the process of removing the paneling and the wall will need to be skinned.
Skinning the wall with quarter-inch drywall is always the final option. If you do this, remember that you'll need to extend door and window jambs, as well as switch and outlet boxes to adjust for the new wall thickness. In your case, you could also try and strip the stuck-on paint with a chemical remover, or one of the somewhat less effective but more people-friendly low-toxic strippers.
Another option in dealing with the walls beneath the paneling would be to get as much paint off as possible and then skim-coat the existing surface with a plaster-like finish. There are several fairly thick plaster finishes available on the market today that are designed for do-it-yourselfers. For example, BEHR makes a Venetian Plaster finish that is beautiful and the faux technique used for applying it can hide a multitude of wall blemishes.
If you do end up painting the walls after removing paneling, remember this: Never use anything but flat paint! If the wall has any imperfections, even a slightly glossy finish will highlight those, while a softer, flat finish will keep them hidden.
Finally, no matter what finish you use, be sure to prime the wall first. Primers are like the glue that makes paint stick. They'll neutralize whatever came before and provide a perfect base for the new surface coat.