"I figure our only option is to paint it (luckily it is not dark paneling). Can someone tell how to do it so we can it look good (enough to sell the house??)."

Is it really a good grade wood veneer paneling or cheap stuff?
Painted paneling looks just like what it is ---painted paneling. If the paneling is quality stuff, you might consider cleaning it and waxing it with something like Scotts Liquid Gold. The paneling might appear dated, but you leave the potential buyer the choice of leaving it in place.

If it's cheap stuff, then painting it might make it look cleaner, but the fact remains that it is painted paneling that any potential buyer will recognize immediately. If they don't like it they will have to remove it also. Either way I can't see a lot of value in painting the paneling to make it "good enough to sell the house". IMHO, The house will sell the same if it's painted or not.

My 0.02

In my experience painted paneling does not look that bad. Mine certainly came out well.

To paint panelling you need to do several steps:
1) Wash the panelling thoroughly with TSP or an equivalent.
2) Degloss the panelling using a commercial deglosser.
3) Prime the panelling with something like Zinzer or Kills.
4) Paint the panelling.

The trick is from Step 2 to Step 3, you generally have to work in sections as you have to prime within a certain amount of time of using the deglosser. If done properly, the results are very good. Luckily, I had only one panelled room as it was a lot of smelly work.

liz2 - Did you fill in the grooves or leave them? Did it end up looking more like beadboard?

You can tape the corners just as if this was drywall to give it the same look as drywall. We taped our corners in our basement and it made them look much better. See the link below for instructions on taping corners.

Here is a link that might be useful: Taping Inside Corners

If you use BIN primer(which can be tinted to the desired color), you will normally not need to do more than wash the paneling with soap and water.

I used to live in a mobile built in 1978---dark walnut paneling. Used Bullseye 123 primer(this is indoor/outdoor) instead of BIN(indoor), tinted to the light pastels the wife wanted, put on two coats of primer, followed by two coats of Glidden latex-----lasted til the recoat nine years later in all the rooms. Recoated with Glidden acrylic latex and that is still on the walls now---although we moved three months ago---ten years. So, the total time so far---and I did not do more than dust the walls initially---is going on 20 years.

1. Wash paneling
2. Use Zinseer shellac primer. This stuff is the best. It sticks to anything and anything sticks to it.
3. Then paint

BIN and Bullseye 123 are Zinsser shellac based primers.

Bullseye123 is NOT a shellac based primer

Bin is.

http://www.zinsser.com/product_detail.asp?ProductId=10

Here is a link that might be useful: bullseye