How you cover the walls around your bathtub should be determined by two factors: protecting the wall from moisture and making it look good. There are lots of choices in materials and methods, most of which you can do yourself. In all cases, make sure the walls around the tub are sheathed in wetrock, which is more moisture-resistant than drywall or plaster. If the wall around the tub is drywall or plaster, then install a thin layer of wetrock over it and caulk it well around the edges.
Ceramic Tile
The classic way to surround a tub is with ceramic tile, which is waterproof, easy to clean and looks great with the porcelain of the tub. Install ceramic from the center of each wall, marking the middle with a vertical and a horizontal line, and using those lines as your guides for the tile lines. Spread tile adhesive on the walls with a notched trowel to secure the tiles, cutting them at the edges with a tile cutter as needed. Grout according to the instructions on your grout mix, and make sure to seal the grout after it dries with a liquid grout sealer. (Marble, slate and other types of tiles also can be used for tub surrounds, though they're harder to work with.)
One-Piece Tub Surrounds
The easiest and cheapest way to cover the wall around a tub is to buy a preformed tub surround--generally made of fiberglass--that simply affixes to the wall on all three sides of the tub and protects the wall underneath. This will only work with a standard configuration of tub and three walls, and it won't win any home design awards, but it's a good solution for a kids' bath and bathrooms that aren't showcased. Attach the surround to the walls with screws and brackets, according to the instructions included, and thoroughly caulk all around where it meets the tub and walls.
Wood
Normally, you don't want wood to be part of your bathroom decor, since it's among the least water-resistant materials you can use. But under the right circumstances, wood can be used to make a real showcase out of a tub surround. Use precut 2-by-2-foot hardwood panels, affixed to the walls with trim nails and glue and tied together with good wood trim. All the wood should be stained and topped with polyurethane before hanging, then given another coat of polyurethane once it's up. That will help protect the wood against moisture in the air, but it still shouldn't be subjected to direct water, so don't do this for a bath that includes a shower.
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