Walls and Ceilings - Is this good insulation?

I am looking to finish my girlfriend's attic (in a 1 1/2 story house, it's the half-story) and am wondering if the "paneling" that is currently on the walls would serve as proper insulation.

The paneling appears to be made of compressed cellulose, and is 1/2" thick, and has been there since she moved in to the house 4 years ago. She has asked a friend of hers, who also does drywall, if this would be adequate insulation, and he stated it would and that we should just drywall over it. This would definitely save us time and money if we did, but is this a normal practice?

Likewise, if we do drywall over it, what would be the method of "trueing up" the new drywall surface with the window and door frames?

Hello jmstroy, insulation needs are measured in R-values. R-values needed are different depending on what part of the country you are in. I am in the deep south and wall r-value needs to be 11-13 and ceilings R-19. Rigid board does not show any value on the chart at this link 19.http://www.fpl.com/savings/hes/contents/insulation_r_values.shtml but I would venture a guess and say that cellulose board would have an R-value of 1 if your lucky. If your in the south thats 10% of whats needed and in northern areas could be as little as 5% of whats needed. Have you looked behind the boards to see if there is any fiberglass behind them? If not and you want the room insulated properly I would pull the boards and install fiberglass bats and then drywall without putting the cellulose boards back up. That would cure your insulation problem and the need to deal with the trim. If you go over whats there you will have to shim the trim boards out from the wall to look right....Mike