Many people have done this. I am not sure if I have seen examples of having the 4" backsplash removed though. Scroll down to tergar's Fnished Backsplash! post for the latest GW example of this.

Please don't casually pull your plaster and replace it with sheetrock. Plaster is the nicest interior finish and *very* expensive to replace. Consider it one of the little luxuries that old house owners get in return for the fuss and bother of owning older buildings. To make a highly satisfactory cosmetic repair over the stain, you can coat it with a stain blocking paint (KilZ is one, so is BIN). You can get these at any paint store. If the leak has lead to a looseness in the plaster, it can be successfully reattached using plaster washers. These are a little harder to find, but not rare and certainly installable by a home owner. If the leak has resulted in a loss of plaster (exposing lath behind) that can also be fixed. A temporary fix is a patch made from a couple of layers of sheetrock and joint compound. A better, and more permanent, repair would be to have a plasterer come (or you could do it, but it takes a little practice) and make a plaster patch. This will not be anywhere near as expensive as pulling the ceiling and hanging sheetrock. And you will still have your plaster which is a wonderful thing to own. Since you are giving so much thought to this potential purchase, I am going add a link to a series of publications put out by the National Park Service that cover a wide range of old-house care and repair issues. There are also excellent books on the care of older buildings, but these have the advantage of being free expert advice, available at all hours of the day. The bulletins cover repairs suitable for buildings ranging from ordinary homes to museum restorations, so the info is very detailed. Pick what level is appropriate for you. The techniques and skills described are easy to understand. I've tackled more than one project with just the instructions in the bulletins to go by. And if you follow their recommendatins, you can also be confident you are treating your old house correctly according to the most widely accepted standards of care. Prospective buyers of old houses are often regaled with tales of other people's "money-pits". If you heart is moved by an older building do not let that dissuade you. Even houses only a few years old begin to need maintenance and repair. The advantage of older houses is that often the orginal materials are much better quality and also often the materials were designed to be continuously repaired as opposed to tossed out and replaced. The main things to check out before you buy an older building (if you plan to live in it right away) are whether the mechanicals (light, heat, water) and the roof are in satisfactory working condition. Structural issues also preoccupy prospective buyers. These can be checked by an engineering inspection, if you are worried. The link below takes you directly to the brief that covers plaster. If you scroll down, you'll be able to link to the full menu of briefs which have info on everything under the old-house roof (including the roof and chimney pots). Since you asked about windows in another post, be sure to check out the brief devoted to window repair, as well. Good luck! Molly~ Here is a link that might be useful: Preservation brief on plaster care and repair

Do you have a Rotozip with the Zipmate attachment? I have used that with a metal cut-off wheel to cut through plaster. I use the metal wheel since it is thinner than the masonry wheel. It seems to work pretty good. I then use a jig saw or a wood zip bit to cut through the wood lathes. Someone may have a better idea than this, but this has worked for me really well putting outlet boxes in plaster walls. I don't like to use the plaster bits that they sell for the Rotozip. They seem to overheat and they don't cut through wood very good at all.

You say that the drywall is breaking down. It normally won't break down unless it has gotten damp or wet. I think before you cover anything up you should determine if there is a problem. If there is correct if first. The plaster loosening up is fairly common. It could be for a number of reason, but I think you should still be sure that there isn't moisture problem there too. As far as covering the existing walls without removing the old stuff.....I have personlly covered I would guess 40 or 50 rooms and ceilings over the years without tearing out the old stuff. Is there insulation in the walls and will you ever need it there? Celulose can be blown in from the inside and, of course, that would be done first. If the walls aren't in too bad of shape I go over everything with 3/8" drywall and use lots of screws. Where you are going over plaster and lathe you will sometimes hit studs, but often just the lathe. The screws into the lathe will hold as long as you use lots of screws. Over the drywall you will have to locate and hit the studs with screws. Also on going over the drywall, you will have to end the pieces over a stud just as if you were applying it to bare studded walls. If you end it between studs there will be nothing to hold the edges and the job will be ruined. When I go over existing walls I make sure that any wiring that might be needed is done first. If necessary I make holes to run wire. If there are any real uneven spots on the wall I shim out the low spots with scrap pieces of 1/4" or 1/8" luan or paneling. I don't remove the door and window casings or the baseboards. I run the drywall right up against the casing and fill in any gaps with mud when I am taping. Now a lot of remodelers won't agree with going ovre the existing, but I've never had a problem as long as I've used plenty of screws that are long enough to penetrate the drywall or the plaster. If the walls or ceilings are terribly uneven you might have to use 1/2", but I've always used 3/8".