How about removing the peninsula and adding a built in banquette in the corner. You can design in storage under the bench seats. That would really open up the kitchen without losing much seating of storage.

Jodi-

Here is a link that might be useful: Kitchen Banquette images.

Thanks very much Jodi, the link is great. I love the look of banquettes.
I wonder if it's possible to make the banquette counter-height so that we can still have the peninsula to prepare food?? My husband is not keen on getting rid of an island or peninsula...

How about pushing the island to the wall that will be removed and the up against the big wall. Still seating on 2 sides.

Or, still move the island forward to d.r. wall, and then create an L, adding lower cabinets on the full wall side as well as the side facing the kitchen.

I agree with your husband, don't get rid of island.

I like that idea, too- cabinetry in the large wall that separates the living and kitchen, and an island in the place of the wall that separtes that dining room. I wonder if the counters that we'll be using will be able to create an L-shape so it's more or less one counter...any thoughts or other suggestions??