Yep course I know the stuff! How good is the insulation against modern products, my guess is not very! Replace with modern insulation and dry wall would be my advice, can you do this yourself? I can advise should you wish to.
Jon, and many thanks for the question as these are the very problems we face every day!
When I lived in Virginia, it was cheaper to blow insulation into the walls through holes and patch everything. (They blow the insulation in from the outside if your house isn't made of stone or brick. Ours had to be done from the inside.) The plaster is a whole lot stronger than dry wall and is pretty easy to work with. Here are some YouTube videos on how to patch holes or cracks. http://www.youtube.com/results?search_query= plaster repair There are tons of videos on decorative plaster work, too☺ Good luck!
Yeah, you can drywall over all of it: plaster and lath. That is an easy way to get a smooth finish when you have a bad wall. You can even put a ¼" 'skin coat' of plaster over the drywall so that it looks original. If any of the plaster is the slightest bit loose, use screws and 'plaster washers' to hold it in place forever. Just try to get the screws to grip into the wood lathing. Good luck!
Drywall is not insulation, rather just interior surface for decor. If insulation is required then the lath would need to be removed and a modern glass fiber or rock wool should be applied to fill the gap. Dry wall or plaster board can then be refitted and a ! mm coat of finish plaster applied.