Thanks for all of the suggestions! I finally decided on a method for covering up the wood paneling and bought all the materials last night. After extensive research on products, I decided to go with Zinsser brand primer and paint. The primer is called B-I-N and is a shellac-base, primer-sealer. It was a little more pricey, but it sticks to any surface without sanding and dries in only 45 minutes. If I would have used a regular primer, I would have had to either sand all of the walls (labor intensive) or use a deglossing agent to get the primer to stick to the paneling. The problem with deglossing agents is that they're most effective within an hour after being applied. If you decided to go with a deglosser or something like "liquid sand", you'd only be able to degloss in sections that you can prime in an hour.
For the paint, I'm using Zinsser's Perma-White, Mold and Mildew proof interior paint (satin latex). It's oil based, stain and moisture resistant, and guaranteed for 5 years. It's actually self-priming and requires no sanding, just like the primer.
Last night, I spent some time cleaning the walls (room size is 18x15 by the way). Every website I visited about covering up wood paneling emphasized this step. I used a 1/2 cup of Trisodium Phospate (TSP) mixed into 2 gallons of hot water. I then just used a sponge to clean all of the walls. After letting the walls dry, I started culking all of the nail holes and scratches on the paneling. I used a silconized acrylic-latex caulk that is paintable. The dry time is two hours so that's all I accomplished last night.
My next step will be to prime all of the walls. After priming, I'll fill in all of the 1/8" deep grooves between the paneling with the culk mentioned above. I want the wall to appear smooth like drywall. After the caulk dries, the only thing left will be paint. I'll post again once I've completed the projected. If you're curious, I purchased all of the materials for this project for only $94 from Lowe's. This includes the primer and paint, 2 brushes, 2 rollers, 2 paint trays, TSP, latex gloves, paint edger, culk, culking gun, and 2 heavy duty vinyl drop cloths. I figure the ROI is going to be well worth the hard work this will take. [:D]