Just looking at what you have currently, the bookcases, either side of the doorway. The bookcases are small so you are not utilising that space effectively. How about two tall bookcases/or built ins either side of doorway. The photos currently on the walls could go into the bookcases. Your colors are dark on the wall and in the furniture which makes the room feel smaller than it is.

Your mirror is not reflecting anything lovely so I would consider taking it down

I think storage in the dining area needs to be improved. Replace existing bookshelves with a couple of these ikea expedit shelves and add basket or coloured boxes to hide away all school related gear. Get the 4x2 configuration

The 2 yr old has taken over your living area! An ottoman with storage in place of the coffee table will be a practical substitute.

You have pictures all over the room. Consider arranging them on picture ledges (white) on your dining mirror wall. Attach at least 2 ledges to house your family pictures and frame prized artwork from the kids.

Re-purpose your existing brown bookshelves by painting them white and placing them beside the TV.
Hang the mirror vertically on the hook where the multiple-pictures- in-frame is (above baby chair).

Your wall colour is very dark. I think you'll be amazed how much larger and lighter the room will look if you paint the walls a lighter colour.
Your current layout makes sense. If you are anywhere near an Ikea, consider using their Besta units to make a storage/TV wall.
It's difficult to see, but would you have enough space to turn the dining table 1/4, place it a bit more towards the window side and have a long shelve act as a desk along the wall?

I agree the space is small and I would remove the shelves in dinning area and have a built in the full length and width of the living room wall for storage and the tv. This will give you plenty of storage and keep things hidden. I would also lighten the wall color and heavy drapes, swap the drapes for a sleak blind. By creating more space in dinning area getting rid of shelves you can maybe fit 6 chairs allowing you to get rid of hi chair and cave one that attaches to the extra chair you have added!!! Good luck and plz post pics of finished product!

Purely on the feel of the room, your drapes are quite full and stand out from the wall. If you would consider replacing with blinds and side panels -- nothing too full -- you should find that the space seems bigger.

Hogan -- we had simultaneous window dressing ideas :). I just took ages to 'submit'.

I agree the built in should be in the dining room space along the wall you currently have the mirror. I wouldn't have desks either side of the TV it would look odd. The kids can use the dining table whilst they are still young. The built in should be for books and photos. The large toys need to go to their room, this room needs to be a space for everyone. The walls are too dark and remove the photos just keep them for the built in space, choose special ones and frame them beautifully. I would do a sectional in front on the window and the dining table in the small space but turned longways if you know what I mean. Agree with the blinds comment too. Good luck love to see another photo.