If you decide on going with just paint make sure you do a few things first.
1- wash with tsp and rince well.
2- sand with 100 grit sand paper to just rough up the surface.
3- when you finish vacuming up the walls go over with a tack cloth.
Now your ready for primer, use a low knap roller and prime with Kilz primer then litely sand, vacume, tack cloth.
If your going with at least 2 colors I would paint all the paneling with the grove color and then useing a very low knab rollor or sponge roller paint out the sections. You will find excellent results this way.
In case your wondering why a low knab roller or spong roller, if you use to much of a knab roller the color will blead over into the groves from the hairs on the roller sleeve.
Quote from glennjanie "Just a thought here. It is possible to paint each board in a pattern of slightly different colors" This looks excellent to by the way and
Quote from Square Eye "The best products to fill the cracks are flexible caulking and then maybe a very thin coat of drywall compound. Then thin coat will be much harder to break because the flex would be limited to smaller areas such as wood grain and nail holes."
This is exactkly what you do if you want to eliminate those grooves.
Just my two cents worth.