You could remove and replace with drywall or just paint over it. Either one would look better.....depends on how much time and money you want to invest.

That appears to be a very simple wall treatment. Off the shelf materials. Probably sheets of 1/4" oak veneer plywood with simple beveled casing for raised panel look. I wouldn't be surprised if it was installed directly over the drywall. Investigate. I see a outlet there on the wall. Remove the cover a see if there is evidence of drywall. If this is placed directly over the studs and you decide to remove it, then drywall hanging is in order. If drywall exists, and you decide to remove it, drywall hanging might still be in order if the paneling was glued to the drywall. If its a true 3/4" thick oak veneer plywood ( check by removing the outlet cover ) then somebody spent a fair amount of money on that wall treatment.

You don't seem to like the room the way it is, and the materials(judging from the photo) are actually only ok at best. Painting it will not look good, don't feel bad about getting rid of the wood.

I love the panels on the walls and the transformation with paint would be amazing! Pick a nice wall color that appeals to you and paint all wood trim a crisp white.

Asking about this wall shows you have good instincts. Trust them and get rid of the "wood paneling". Paint is not going to make these walls look like the paneled walls in the photos above.

The wood wall appear to have a shine, ie they probably have a urathane finish (or similar) you will need to do a fair amount of work to get the paint to bond. You will need to sand prime and paint. And since the wood appears to be oak which is a hard wood with an obvious grain youwill not get a totally smooth finish when done.

I agree with Jackson and Keitha

I'm a bit weird in that I like the look of painted wood, even on walls. I actually like the look of wood grain under paint. So, it would be helpful to know a bit more about your tastes. Can you post some photos of rooms you like?

@zindor..I like the wood grain under paint too...

look of it

Sorry but I disagree with @ pgeis :-(... The panels add architectural interest to the room and they would be lovely painted. It would be a lot of work to prep and paint the walls but removing the panels, patching and painting will be work as well. So, go with what YOU like and what you are comfortable with when considering the time and expense involved.

These walls would be beautiful painted a light cream colour! Don't let go of that trim.

Paint them

I have painted wood walls before and LOVED how it turned out! It will completely change the look of the room and add color and character! All the wood makes the room look dreary and a fresh paint of coat will definitely brighten up the room! I would paint the walls in a light color such as sage green and trim it out in white! Unless you don't have whitewalls in your home already then just paint the trim as well. You can paint it the same color as the walls or another accent color to blend.

If it were me, I would weigh the pros and cons. If you like the look of painted wood paneling and are up to the task, it could look nice-but I think it could use a better trim job/baseboard for sure. If you like the look of sheetrock better, I would remove it.

I like the idea of painting the walls and doing the trim in white. (someone has a picure above in grey and white). Artwork in some of the upper panels would be stunning. If you do the work yourself it wouldn't be an expensive fix. Try one wall and see how it looks. What have you got to lose?

Panli, you have touched on something not yet addressed: the modest size of the room. Generally speaking, the more that surfaces are subdivided and broken up, the smaller the space will feel. In this case, an already small space feels even smaller because all the wall surfaces have been broken up by this ill-conceived paneling. The reason I say this is that the scale and proportion of the paneling in no way relates to the architecture of the windows, ceiling height, etc. Also, the top and bottom panels are the same size and nearly evenly spaced, top to bottom, Bad proportion, bad scale. Some of the pics posted in the conversation illustrate examples that are much more pleasing. In all cases, the wall height is divided approximately into thirds, with the upper part more open. This maximizes perceived ceiling height and helps ground the room. I suggest removing the molding and painting. It was poorly done from the beginning and looks - dare I say it - cheap. One can certainly be cost effective without the result looking cheap. That did not happen here, regardless of investment.
However, if you opt to leave the molding, paint walls and molding the same color to add uniformity and minimize the choppy effect of all the broken surfaces. Once you have made the decision about the walls, add draperies that go from just shy of ceiling height to the floor. Vertical lines maximize space impression and perceived height. Good luck!

Doing wood paneling is not an outdated thing, but it is all how they designed it and what wood it is? I agree with Jackson to remove top and bottom boxes and adding a chair rail. In addition to that, you can add crown moulding and enhance window frame , and paint as white. That way you can brighten up the room a bit. As others said, if the panels are too thin, you can't sand and paint them.
I recently did a project that has alder wood panels with glaze that gives elegant look than oak. My advice is if you don't like the oak, take away the top and bottom boxes, instead of removing all the panels, install wall board on it and paint what ever you like. You can do this only if the panels are too thin otherwise it will be too hard to instal wall board on a thick wood panel. First find out how thick the panels are.. hope that helps..

There was recently a thread on the site discussing the merits of chalkpaint, which could,granted, give a wholly different look than what you may be imagining, but has the benefit of needing no prep, and can be made at home. Reciped is provided on the thread and is inexpensive.

Thanks so much for all your suggestions. I just checked and it is only 1/4" thick... Thanks all for great ideas... Big help!

My only input is all the squares are different sizes- it's kind of odd. I think painting them will make this more obvious. Plus there are strips between each panel. I would figure something else out. Not sure of the age of your home- but they put this paneling up for a reason. What is underneath is probably a huge project. I would remove all the squares patched the nail holes and then paint.