Sounds good. Make sure your finishes work together tonally while providing some contrast.
For the ceiling light box, I would have a contractor drywall to close off the light box flush with your ceiling and add recessed can lights.

MMILOS, You mean have the kitchen ceiling remain lower than the dining area?

An idea: Remove the ceiling light box and sheetrock the inside. Now you have a coffered section. Run a built up crown molding around the perimeter and line it with hidden LED's. Use a group of small surface mounted cans set in a geometric pattern, or a single surface mounted fixture. Finally, install a slightly reflective textured wall paper on the ceiling and perimeter of the entire section. You'll have an updated version of a light box. If you can use a trimmer refrigerator, that will help too. For the floor, use a good looking porcelain in a texture similar to granite and lay it diagonally. This adds interest. You can use a detail tile mixed in (smaller size than the field) and pick up an accent color. Use the accented color for counter tops and backsplash. If you are keeping the chairs and table, have the chairs stripped and painted or glazed with color. If you're keeping the stove, don't do very dark cabinets, this will just accent the dated feeling. Use a middle tone color for the cabinets and keep white in the mix by using a white accent tile in the floor.
Good Luck!

New cans is a good idea. Once you pull down the ceiling you will know a lot more about structural and hvac requirements that will dictate lighting placement. Unless of course you really want to rework things. If that is a heating supply, you could always do an electric mat, but it might be feeding other ducts.

Why is the ceiling lower in the kitchen? You may need a carpenter or electrician to pull down those florescent fixtures and take a look and see what is going on up there, I would suggest doing recessed lights that take halogen low voltage MR16 bulbs around the perimeter of the cabinets and adding some xenon undercabinet lights

Frank, the attic is not floored above the kitchen and I can easily see that there is a flexible type heat/ac pipe supplying the register in the kitchen ceiling. I am fairly sure it could be moved to a different area of the ceiling without compromising anything. More than likely the lowered area is just a thing they did in the 80's when the house was built. Some I have seen are recessed like mine, others were a box built on a regular 8 foot ceiling. I'm impartial though...I hate both looks. :)

I like the idea of recessd lights . Is there anything in LED lighting that would cast enough light and yet be a warm light rather than the bright white of some fixtures? One thought I had was placing them where needed or task lighting but not over do the number I put in. I have under counter lighting already. Have toyed with putting a couple small pendant lights over the bar and a matching one to replace the over the sink fixture. I want to install a different valance over the window that is smpler; ditch the 'scallops'. When ceiling is finished, I think some decent molding a the top of the cupboards would dress things up a bit.

On the other end of the cabinet paint spectrum...I would consider painting the cabinets white so the appliances blend in rather than jump out. The appliances are way too new to replace. I cannot justify that or afford to go that route. Hardware will change the appearance a great deal regardless of the paint choice.

I am attaching a pic that demonstrates a ceiling that would likely work in my kitchen.

I agree with you, I hate the dropped ceiling look and would definitely remove it....LED is such a new technology and I would be afraid to recess some very expensive fixtures in my new ceiling and find out later (after they burn out) that they are already obsolete... I am sure you will hear from lots of people touting it as the latest and the greatest but I am not convinced, I still recommend the halogen to my customers and I would make sure you place them on either side of every work area in the kitchen so the beams cross and you are not standing in your own shadow, so position them slightly in front of you (more towards the cabinet doors, not behind you)

In this small an area, how many would you recommend Frank? There are a plethra of 'wattage' choices as well. It is all new to me. Here is another question. I have a fan with light over the eating table but would like a nice light. However, a fan is useful when the room heats up during meal prep. Does anyone have any opinion of a fan in the kitchen once the ceiling is raised to a normal 8' height? I lean toward contemporary, clean lines and wonder if a fan would be a disaster esthetically.

The only problem with ceiling fans these days is the new government laws that are reducing the wattages on the bulbs they use, the older fan lights would take 4-60 watt regular light bulbs but almost all the new ones only take candelabra bulbs or fluorescent bulbs and they are not enough light for most applications, the other issue would be if the fan blades are too close to the recessed lights they will create a strobe effect, which is kind of nauseating ....but if the fan is far enough away and you don't need alot of additional light in the room then go for it, I love fans for circulating heat and air conditioning, I also think adding some decorative pendant s would be nice over the sink and the peninsula

LED's are available in 3 "temperatures". They go from bright "blue-white" to a less intense warm white. The bulbs last a very long time and are not difficult to replace, though it will be years before they need to be. I've incorporated Led lighting into Kitchens, Baths and furniture pieces.
Concealed in a cove these lights add ambient illumination and are inexpensive to run. For direct lighting LED's work well. Like many Kitchen designers, I usually use Halogen for task lighting and LED as accent.
As far as your ceiling fan goes, once you raise the ceiling the overheating of your Kitchen may no longer be an issue. If you are unsure about this you can consider adding an exhaust fan built into the room. Another idea would be to take down the large microwave, install a hood, and replace the microwave with a smaller unit. Often the exhaust built-in to microwaves like yours simply recirculate the hot air and hence just waste electricity.
In any case, your thought about turning the cabinets white is a good one. If they are dinged or dented, be sure that they are prepped well before painting. You can achieve a nice finish by painting and then glazing them too.
Attached is a picture of a Kitchen which had LED and Halogen lighting. The other photo shows a built in wardrobe with LED's running across the top, behind louvered crown.

PS, you'll need to click on the first picture to see the lighting............

The white cabinetry with oak floors is so easy to live with. I did it in a kitchen that I just sold and I miss it - you can make it work so many ways. Definitely consider continuing the hardwook.

I was perusing posts for info on Xenon undercabinet lighting. I was intrigued by your project. Did you get it dome or have it in progress? I'd love to see photos!

Jeffrey Brooks Interior Design, the additional pics look better! Usually, when the fluorescent 'box' is taken out and crown molding put in, it tends to look like 'florescent light taken out and crown molding put in'. Not better, just different. I would raise the ceiling and place canned lighting in, with spot lighting/hanging pendants where needed. It'll look great!

Fun idea Ginnesee suggested. Whether you do that or with dry wall, I like the idea to open it up and clean it up..put in some recessed lights and a fun chandelier!

As a kitchen designer, I I feel that lighting is s crucial part of any remodel. I wrote an article for my clients that you might find helpful: http://bit.ly/1pgE1Pv

You could most likely rip that ceiling out and put up new sheet rock and texture accordingly to make it even. The problem would be the cabinets would have a gap at top. You could put up some crown molding across top of cabinets to make them look better. If there is enough of a gap between top of cabinets and ceiling you could add lighting.