We are remodeling our early 1980's bathrooms - replacing outdated tile and foil papers. Two walls in one bathroom will be done with grasscloth. It isn't prepasted, so we'll be putting on paste as we go. Is it necessary to remove the old foil paper or is there some way to treat it so that the paste will stick to it?

I would probably remove the foil paper. Coming from experiance with foil paper, it can be stubborn, especially if it has been on the wall for years and years.
In your case it probably has been there for appx. 20 years?

We lived in a house that had it in the living room. Hideous hideous stuff! What we ended up doing was sanding the foil down, remvoing the decoration and then using it as a liner paper for new wall paper.

You can try putting a wall removing solution on it and lettting it dry then sand it. That might help too.

Just a little advice- Grass cloth, all though it is good paper, isn't really recommended for places that have alot of moisture, such as bathrooms. The steam could cause the paper to wear and possibly stain.

Whatever yopu do though, I wish you the best of luck with that pesky foil wallpaper!