i have seen chipboard type plywood used many times for a garage/workshop. it is cheap (sbout $5 per 4x8 sheet) and just slap a few coats of white paint on it and you have covered walls that are sturdy, you can nail and screw to, and wont break the bank. its about 1/4 of the price of sheetrocking it (if you hire out the tape/mud), and about 1/3 of the price of paneling.

you can and should use self leveling compound to fix this. it is pretty easy to use, just mix it up per the directions and pour it in the lowest spot. keep adding it until the floor is level. if you use a board or other long straight edge, you can tell about what size area will need to be filled.