My house is about 50 years old and many of the walls are plaster. If done nicely I would consider this a plus but it looks like my house was plastered/painted by a a 2nd grade art class. I don't have the money to get it professionally plastered so I ask; What is the best way to smooth them out? Can I sand them? Is it possible to cover them with drywall?
The best solution is to get them replastered. However, this is a messy and expensive job as you need to hack off the old plaster first. The expense comes from hiring a plasterer.
The cheapest solution is to cover them with drywall. This will give you a nice smooth wall.
You can glue the drywall directly to the plaster which will work if the current plaster is not too uneven. A better finish will be obtained if you batten the walls first ensuring that the battens are vertical and level horizontally. However, as @Tester101 points out you'll have to "pull out" all your sockets and light switches and have issues around door and window frames.
A better solution would be to rip the plaster off and then plasterboard, again either gluing or battening depending on the quality of the wall. Battening would allow you to add insulation and/or a void for feeding any cables you might want to add (ethernet, coaxial, power) in the future. This is still messy, but should be cheaper.
Sanding is possible, but it will generate a lot of dust and is a lot of effort for indeterminate results. If the plastering isn't too bad you might get a good finish, but you will have to skim the walls again to get a really smooth finish.
Our house has majority plaster walls that were all covered with wallpaper. The process of removing the wall paper, some of the plaster cracked off (sometimes an area 3ft x 4 ft)
We used regular everyday drywall plaster; we used drydex; we used a mastic plaster to repair plaster walls.
Sanding the old plaster walls doesn't work. Its to dense and was just a waste of time. We skim coated over as best as we could; primed and painted until we could remodel that room.
Removing the old plaster / latte walls is just labor (and ALOT Of trash) - a room we're doing right now, no more than 11ft x 12ft produced 50 bags of trash.
Drywall is relatively inexpensive per sheet. Its easy to cut and with the help of a friend, easy to hang.
Opening the walls like this has a tendency to present more problems (poor insulation, poor electrical) but these are opportunities to increase the value of your house. Budget pending, updated electrical / voice / data / insulation will only increase the value of a home.
In our room, we decided to do it all; new doors / windows / etc... How far do you want to take it to have nice finished walls?
(the previous home owner went over plaster walls with drywall in the kitchen. This is a bad idea and only upset me more as it exposed a mildew / water leak problem)