Remove the black chair with it's footstool as well as the unused shelving.
Move the couch over so it is more centred on the rug.
Move the single chair to opposite side.
Use creeser's ideas on window seat/storage and ottoman. Ottomans can have storage too.
The rug looks fine. The wall colour does too.
The Timothy De Clue Design above has simple venetians that would work very well. White or timber depending on your tastes.
If you want a bit of dramatic colour a few scatter cushions on your couch could complement the ottoman and window seat.Yes, pick up the blue from the neighboring room and the yellow from the painting.
Also, removing the bookshelf gives you some wall space to hang your pictures.

Thanks guys - great ideas. I think the upholstered ottoman and removing the brown chair ideas, in particular are fantastic. I also like the idea of the cushioned bench but I'm thinking that would be a major undertaking involving contractors to do a built in. no? It's hard to see from the pics but the living room only has two big walls, the other two are walkways into the dining room and the entrance hall so I'm worried that if we moved the big green chair to the other side it would block the walk way, perhaps that doesn't matter. What color do you think for the ottoman?

I think brown or navy for the ottoman only because you will be propping your feet on it and children will be playing on it. Hides dirt better.

You need drapery panels to give this room some vertical interest. Hang them as close to the ceiling as you can. You can hang them on the outside of that alcove. I would love to see a darker rug to ground the room.

I think Shutters would really look amazing . I would not recommend drapery it will close the room in to much fabric.

http://www.blindsdirectcanada.com/shutters-toronto.html

I've seen a cheap IKEA hack using I think an ektorp bookshelf - they lay it on its side and make a (blue?) cushioned top for it - voila! A bench seat with storage cubbies underneath.

Practically speaking, with the toys where they are, it seems like your kiddies would be blocking the walkway when they play! So it may as well be the arm chair, I think!

I agree with previous comments about removing the empty bookshelf, and buying a dark blue / navy ottoman its a timeless colour, practical for footrest and children and will tie in with the adjacent room.

Bring in some more blues in cushions, art, ornaments (maybe the window seat cover) to create a cohesive colour scheme.

I think do the drapes last. With all of the other pieces in place you will be able to decide on whether to go for a patterned or simple curtain design.

:) Elise

what about these nice curtains?

Thanks for all the input. I like the idea of pulling in some of the blues from the dining room - dining room being blue with some natural accents and the living room could be the opposite; natural with blue accents. Thanks for the ideas on curtains and shutters too. We'll probably start with white shutters, yes I'm too chicken to veer from white, and then add the curtains later depending on how the room plays out. I'll add pics once I've made progress.

It is soooo easy to build a window seat.....it's just a box...just attach a 1x4 or 2x4 to the back wall and side walls, put a front panel of 3/4" plywood for front of box and another piece for lid....put 3-4" foam on top, staple fabric around for top. Trim out front with molding, add a little wainscoting detail or beadboard... and paint....With a little more skill, hinge the top and add separate cushion...better for frequent access (I just used unattached top and lift it for access) If you have a few more bucks there are plans using stock cabinets...check out Family Handyman, they used to have directions...but I'm sure there are a ton of directions on net. Shoot Lowes will cut all the wood to size and you just have to assemble.

The biggest issue I see is the casual white and beige color pallet feels like it has no personality. I know color can be scary but your room is giving a strong "bachelor vibe" right now. You mentioned wanting to bring some blue in. I'd suggest looking for some accent pillows, things to go on that shelf or wall art that combine blue and a muted orange or warm tan. The white and beige you are using are both cool white and beige and its making the wood floor the brightest color in the room. I'm trying to bring some of that color upward so it's there are equally eye catching things throughout the room.