You can smooth out the walls but it will take you a bit of time and elbow grease. What you'll need to do is get a whole lot of joint compound and a trough and fill in all of the dents with it. Let it dry (probably around 24 hours) then sand it (get one of those sanding blocks on a stick for up high and don't forget to wear protective eyewear, gloves and a mask). Then you'll need to do a second coat but this time you'll need to even things out even more.

Once it's dry you'll want to look at it again (most importantly feel it), sand any high spots, fill in any low spots and let it dry again. Once last round of sanding and you are ready to prime. Just make sure you use the right kind of primer before you paint. I learned this the hard way because if you don't you will end up needing 2-3 times the amount of paint to cover the walls. The reason why is the joint compound actually sucks up the paint. I don't remember the kind of primer you need as it's been around 4 years since I did it but just ask for a primer that seals bare walls at your local home improvement center. Also make sure the person you are asking really understands what you want.

Good luck and make sure you take pictures and put them up on the site so other women with stucco walls can learn from you!

As long as the wallpaper is well attached to the wall then you should be able to do this. Just make sure you paint over it with the proper primer to seal it before you go to paint (it will save you gallons of your paint color).