You certainly can keep this furniture and work a design around it. The first thing you need to do is pull the sofa and chairs closer together with a coffee table in between that both can reach. That way, they'll be close enough for conversation. Don't worry about the space left over; you don't have to fill it up.

You could also turn the sofa to face the fireplace and put the chairs on either end, still with a coffee table in the center within reach of everyone.

I'm not usually a fan of area rugs on carpet, but you could use one here to define the space. Some art on the walls, some lighting (a definite need), and a careful styling of the mantel and you'll be good to go.

Agree with groveraxle: Have the sofa facing the fireplace and am not usually a fan of area rugs on carpet. Mantels should be left uncluttered -- one piece of art on the wall above the mantel usually suffices -- do consider pressed metal interior wall art instead of a picture for a less formal look.

http://www.decorlove.com/ideas/photos/pi/2/pottery-barn-metal-wall-art-449-i-have-this-on-my-living-room-wall-and-it-looks-amazing.jpg

http://www.brilliantwallart.co.uk/admin/images/Metal_Wall_Art__Bird_Migration_Sun_54495.jpeg

https://s-media-cache-ak0.pinimg.com/236x/08/71/01/08710134908b47b0b07153c0bfb94a4b.jpg

Since you indicate you want to relax in this space, consider adding an ottoman -- either a single long rectangle storage ottoman (with flip top that could be used as a table if needed) or a pair of smaller ones instead of a coffee table since you could use the end tables for the same purposes.

Put an end table or floor lamp table combo

http://i5.walmartimages.com/dfw/dce07b8c-4b0c/k2-_803e3ff0-c159-40a0-a660-1f0575168ffa.v1.jpg

on each end of the sofa and put a chair on each side of the sofa at a right angle to the sofa, sharing the end tables. If you do this you likely will not need a rug to define the conversation space. If you do add a rug, though, do remember that if you use the fireplace as a wood burning fireplace, the rug likely needs to be one rated for in front of a fireplace.

The bay window adds great natural light. You could add a bench /ottoman centered there as a window seat

https://s-media-cache-ak0.pinimg.com/736x/b2/21/54/b22154a81373f38a50e938ebd25569d4.jpg

http://ak1.ostkcdn.com/images/products/P15774526.jpg

http://st.hzcdn.com/simgs/9ad1cb680589d65a_4-6676/transitional-accent-and-storage-benches.jpg

http://st.hzcdn.com/simgs/dd01c524050b16f6_4-9402/traditional-upholstered-benches.jpg

as well as a plant on each side -- consider snake plants in large pots, each on its own rolling dolly or plant stand.

https://www.google.com/search?q=snake+plant&client=ubuntu&hs=vEs&channel=fs&tbm=isch&imgil=7FHvfPg-6fET4M%253A%253B8rlcEnUT1KAOGM%253Bhttp%25253A%25252F%25252Fwww.crocus.co.uk%25252Fplants%25252F_%25252Fsansevieria-trifasciata-var-laurentii%25252Fclassid.2000027233%25252F&source=iu&pf=m&fir=7FHvfPg-6fET4M%253A%252C8rlcEnUT1KAOGM%252C_&usg=__AGLQog5olenorr2DT6bFfDzyJDY%3D&biw=1366&bih=635&ved=0ahUKEwiZkOeSx_nMAhWJQD4KHdZdBjYQyjcImAE&ei=hN9HV5m-F4mB-QHWu5mwAw#imgrc=7FHvfPg-6fET4M%3A

I would definitely install a big light fixture that can be put on a dimmer switch for those cozy nights by the fire.. I think any room where you're not using up the entire space needs an area rug to create or separate the "space" that you're using up - wall to wall carpet or not. I think your current furniture to work if you just add some things to cozy it up! End tables, lamps, pictures, coffee table etc.

Thanks for all your suggestions - they have given me the push I need to get shopping! I really appreciate it - will post "After" photos. Thanks again!