When you say update?? Exactly how much would you like to do? It really looks like it just needs some decorating. Also, how old are the kids? I don't see rubber duckies, so I'll assume their over having toys in the tub. Also, I cannot see the color of the vanity.

Options: The tub tile is a little boring, so you coulld replace it, remove some and add some decorative accent tiles, or replace the shower curtain with an obscure glass enclosure (like a rain glass pattern) glass doors have towel racks on the exterior to add some decorative towels. I would remove the large mirror and replace it with a framed mirror, and lower the mirror closer to the vanity top, add a decorative backsplash around the vanity top and run electricl for a lightfixture, sconces on each side of the mirror would be pretty and functional. Then add some accessoroes and art. The niche on the left of the vanity could have some glass shelves inserted and pretty utilitarian pieces, like lotions, pretty jars for cotton balls, Q-tips a decanter with mouthwash etc. Then you can paint the walls a color that coordinates with your "new" backsplash tile, trim color and flooring.

You have great bones there, and can make it functional for kids and appealing for guests as well.

The kids are older and past bath toys. I like your ideas. Not sure I want to invest in changing the bath tile but was thinking I could paint the walls and that would help. Smaller mirror would be nice and hadn't even noticed how high it was. Like the glass shelving idea. I don't like the gray trim and my husband dislikes the vanity.

If the layout works for you then it's just a matter of updating the material.

My first thought was to paint the trim white or off-white, depending on what you have in rest of the house. Any wallcolor would work as it is mostly a neutral backdrop. Find a shower curtain or fabric and have one made and go from there. Agree that the mirror could be replaced with a pretty framed mirror. That will give you room for artwork over toilet. Can't see vanity but looks fine at first glance. Just some color and accessorizing and you will have a lovely room. Good luck and send "after" pics.

The cheapest way to improve the useability of the shower is to add an arched shower rod.
The mirror could be changed to one with integrated light/med cabinet. The vanity floated and under lit.
http://www.bing.com/images/search?q=Small+Floating+Vanity&Form=IQFRDR#