Rip them out and put them to better use in a closet somewhere.

Is there a way to cut them down to wainscoting? I bet the space would feel a lot bigger if you weren't surrounded by cedar. Have fun!

Modern: Keep the tub and the walls, change everything else. That is an AWESOME tub. Put down rock on the floor, maybe rock/ granite slab on the wall around the tub... make it spa-like. I like the walls, I just think that the cabinet/tile counter/floor is making them cottage chic.

I would not remove them they add charm. I would leave one wall natural unpainted maybe the one behind the bath tub and paint the rest white and have all white updated fixtures. The natural one would make a nice back drop behind the tub, spa like. Then go clean all white and add maybe teak bench or floor matt to tie in the wood.
That would look beautiful modern, with a cottage feel.

Take a look at style files, she has a great eye and there are lots of pictures showing natural wood elements in all white, clean modern spaces.
http://style-files.com/

I'd do it in steps. Put in the new sink, shower, and floor like you want and see how everything looks. It could very well be that when you put in several new contemporary elements, the wood will have a whole new context that you like. But, it's easy enough to paint it white if you decide it is still too dark.

I don't know what your budget is but I would keep that great tub, keep the cedar and paint it all white to brighten it up. Then I would spend my money on a modern vanity, sink and mirror. I would also budget in a really cool floor tile. If you have the money to do it...get rid of it, but if your on a budget...spend it on nice amenities....not drywall. The lines of the cedar can look really modern, especially if your paint it with a high gloss. It will look brighter. Also, I don't think the ceramic tiles will look weird transitioning. You could continue the flow of the floor tiles up on that part of the wall....(like a glass mosaic) Or, on a budget, pick a ceramic subway tile to go with the white on the wall.

I like the walls, but I don't like the sink and the corner shelf or that mirror.

I'd find something that better matched the room better. The tub would stay if it were up to me. I hate modern tub/shower combos.

Keep the walls... Paint the ceiling white. Consider painting the trim white as well. Replace the small mirror with a really big one and another over the bathtub to help bounce light around. Stick to light/white art and accessories.

Cedar takes a heck of a lot of work to paint. We have cedar closets and were considering painting them white. We were advised against it, as they require an oil based primer and a couple of coats of paint. I'm glad we didn't paint them. A light sanding and they made the room smell terrific!

I agree with Phil 121. I have a tremendous amount of wide paneling in my living space. Some was painted an eggshell Cream color with a wall left to show off the wood (very similar in tone). Any floor will go with it. Awsome tub!

I'd keep the bathroom as-is - It's a waterfront home so let it have some waterfront character.

I'd might update the countertop and sink - but I wouldn't tear out the vanity as you have no idea if the paneling continues behind and what condition it's in.

I'd never paint the cedar - it's too porous and fragrant to paint. If you wanted to sand smooth and shellac/varnish for a yacht-like finish, that would be really cool.

Update the mirror and lighting, get some brass accents in there but toss the nasty toilet cover.

Jumping on the bandwagon. Keep the walls! Consider painting the ceiling, trim, and vanity white. Loved the early suggestion to add some other natural elements. Stone floors and shower walls sound spot on.

I have a similar bath. I plan on painting mine white as well as putting in a black & white tile floor.

I'm normally in favor of painting wood like this all-white, but this is one of the few examples of wall-to-wall wood I've seen that I think actually looks nice. So I think you can pull off keeping the wood if you want to.

I would get rid of all the clutter on the walls (esp that dark cabinet above the toilet and the corner shelf). The furry toilet lid cover or whatever it is can go too. Then bring in some light, pretty cottagey accessories and towels to lighten the place up a bit. I would also change the sink and get rid of the vanity, but check what the state of the wall behind it is first.

As for the shower, I think you're right that tiling might look busy. Is it possible to get a shower that's a complete sealed unit instead of tiling? Or to use a clear glass or plastic panel instead of tiles? Failing that, using large tiles might help to reduce the sense of business.

I'm not sure what I'd do with the floor, but I'd keep it light.

I would refinish the walls to release that great cedar smell, keep the tub, retile with stone and extend it up the wall on the sides of the tub so you can more easily shower there, update the vanity, get rid of the cabinet above the toilet, maybe replace with shelves if you need them that match the updated sink area. It would be such a shame to lose the cedar and the tub. Work with it and let it shine.

One thing that I've noticed with wooden panels is that to make them look modern, all you really have to do is orient them horizontally. You can maybe do one focus wall with the cedar panels horizontally and the rest you can either paint or remove completely, but that would definitely give your bathroom a more modern, updated look.

Keep the walls! Or at least the bottom half as one poster suggested. They are SO waterfront cottage and you can lighten up the space some other way. Sand them now and then for an awesome scent

GO!

I'd be all for keeping the wood paneling as is, if it was old and charming. This is not.

But this would look nice painted white. And it CAN be successfully painted with the right prep.

Are you familiar with Anna Dorfman's 'Door Sixteen' blog? She is a master at creating a modern aesthetic within her 1880s Victorian home. See one of her bathroom updates (with painted wood walls) here:

http://www.doorsixteen.com/2009/12/15/my-downstairs-bathroom/

Are you sure there is paneling behind the current vanity? Many a tile job does not extend behind a large vanity. I would not be surprised to find the same with this paneling.

I would keep it (perhaps removing and replacing with plain drywall on the wall with the sink, depending on what is going on with the area currently behind the vanity).

There are so many things wrong with this bathroom, but it's not the cedar walls and claw-foot tub—these are the the things your bathroom has going for it! Work on everything else and the walls and these elements will come alive.

I agree, keep the walls, sand them a little for the aroma. Keep the tub. Everything else: stone and glass - it'll be beautiful and modern.

I think that you could use the paneling to create a modern look because of its spare geometric nature. If you use modern cabinetry, fixtures, and flooring, I think it can look modern.

I would keep the cedar walls. As one of the other commenters said, it does have that sauna look and although I'm not usually a fan of the natural wood panelling, I like it here. I'd say there's a good chance, though, that the vanity doesn't have wood behind it, so if you're planning to tile the walls around the tub, you might need to use the wood panelling from that area in order to have your wall-mounted sink.

The vintage shower ring is a great idea -
- after all, if you put a shower in the corner, where are you going to put the washer and dryer? (Which I would have enclosed in a new closet)

Keep the cedar, put in a nicer mirror above the vanity. Get rid of all the clutter and the cabinet above the toilet. If you can I would look at enlarging the window, this would brighten the room.

Thanks everybody for your comments! This picture is from the vendor's listing, so it's from the actual owner. I'm keeping the bath, but as we mostly shower, I'd like to have it separatly. And since I don't like to clean, no glass, just a curtain with a corner rod.
@home body: excellent suggestion, I can keep the wood at first and refresh it, change everything else, and then paint if I still don't like it!
@ arroyo: that's exactly what I had in mind!
If there is no wood panels behind the vanity, I'll just continue the tiling for the sink (backsplash)
@bepsf: the washer/dryer are not showing much in the pix, you can see part of it at the right bottom corner, so no prob there.

I agree with some of the other commenters. The walls are actually kinda cool and cottage-y, (and the tub is awesome), but the little cabinet, the window, and the sink area make it look old-fashioned. I say keep the walls and the tub, and make everything else fabulous.

It will be modern and unique :)

I'm surprised nobody did a comment on the toilet paper rack!! :)

Oh! and I'm digging on the spa idea too!
Thanks!