The '70s aren't dead yet. It still exists in the dark wood paneling installed in many a house during that decorating-challenged decade. Paneling made sense in its way: it was inexpensive and easy. You could do a basement in an afternoon and avoid the mess of drywall. The problem was that most of it was really dark, making said basement resemble a cave, and looked cheap (because most of it was).
Now, it sticks out like an avocado refrigerator, saying I'm nearly 40 years old and out of date. The problem is that the same problems it solved back then still exist. If you remove it, the odds are there is no drywall or plaster underneath. And if there is, the paneling may have been hung to cover it up. So what do you do?
Here are three solutions ranked from most difficult = expensive to easiest = cheapest.
1) Remove it and drywall. Yep, that's the best option for looks but the messiest, most expensive, and most time consuming. For a basement, it may not be worth it. For a family room, it just may be. Unless you're really handy, this is probably a job for a pro. (That's honest advice from one who drywalled a basement. Once. Here's a tip - don't use overhead/can lighting for your illumination source - it hides defects. Use a spot light or standing lamp to get light from the side.)
2) Fill in the grooves and paint. This takes some time and talent with spackle. But when you're done, it will look like drywall and be a heck of a lot cheaper. (Remember the light trick from #1.) For step by step instructions and helpful tips, check out this article from bejane.com.
3) Paint it. Use a good sealer first. Then paint it any color you desire. The grooves will still show but the color will be better. We had this in our current house before we remodeled. It wasn't bad, really. The paint color itself was boring, but the paneling didn't look bad. This is also the best solution if you need a quick fix because you just can't stand the paneling until you have the time or money to do option 1 or 2.
Either will be an improvement. If you have a better idea, please share it in the comments!