whats with those window cut outs i would fill those, it will give you a lot more wall to work with. i would get a small round espresso table to match the cabinets. i wouldnt put in a fire place. i would have a long console with book cases at either end and a couch across the area where the pony wall is, and two chairs.

I like what flair lighting said but you can still put art in the recesses and it adds a little something so I would leave it. Decor ideas: choose a color that you like and fill the shelves in the half wall with colored knick knacks....give the room some color and life! I'd also pull mother same color through to the living room when accessorizing (pillows, art, curtains...)

Also top of the cabinets....