Hi! I just renovated my 1946 California Ranch bathroom and also had walls that were in pretty bad shape under the wallpaper. I knew that my walls were plaster and lath. I washed the wallpaper paste off with plain water and an abrasive sponge a few times being careful not to get the walls very wet through this cleaning process, then let the walls dry overnight. I next undercut the bad cracks and holes and chipped away all surface plaster that was not tight to the wall. After dampening the areas to be patched, I used pre-mixed patching compound and pushed the material into the bad cracks and smoothed more over all the other crumbled areas. After it dried, I sanded the areas until they were as even with the wall level as possible. BTW--I also embedded fiberglass mesh tape over the bad cracks and holes to help keep them together longer. I know that those cracks will reappear with time as my house shifts from year to year--I live in earthquake country where we're "moving" all the time!
After vacuuming the walls and trying to get all the plaster dust off, I finally used a good quality primer/sealer that has a mildewcide mixed in followed by two coats of interior latex enamel paint with a satin finish. I also finished the trim and door with a high-gloss latex enamel paint after prepping and cleaning.
I recaulked all around the bath and wherever was necessary to keep the areas as water-tight as possible.
I decided to put up new towel bars, etc. to match the new look. This all took a long time, but I'm so happy to see such a clean and beautiful new space that it was all worth the effort! It makes me smile just to walk past the bathroom!
Hope this helps. Good luck with your project!