I see a window there... good! Is it facing north or which direction is it? Are the doors & trim throughout the house all dark brown? Light doors & trim would help alot. Lighter happy paint colors, such as butter yellow or limon walls would bring a sunny warm fresh feel to the room. Try some punchy colored feature walls as shown in Manon's above photo (thanks Manon). Get new furniture & some fun colored art & accessories, everything's looking very dated. Better lighting & a tall floor lamp that spreads light across the ceiling or corner. Lighter drapes (with grommets) down to the floor would help OR Roman shades or 2" faux wood blinds covering just the window would modernize the space and give you more wall space. New flooring in updated colors such as white-washed gray driftwood. Designate areas or stations in the room for different activities, such as floor games in one corner with colorful interlocking foam floor mats, comfie seating (bean-bag chairs) for movies in another area, table & chairs for table activities (coloring/puzzles/games/crafts), etc. Are your children boys or girls? That'll make a difference in what you choose and how you put it all together.

What a fun space! Love the pillows...I agree with above, lower all the frames, but not so low little ones can reach. The art should fall at eye level about 5'4" for walls and for behind the sofa not more than 12" above it. Then keep the width about 5" inside the sofa length on each side. Your frames are small so you need the close together for impact. I would start with some pretty curtains for the door and large window and then a simple Roman shade for the small window- since your girls play there you don't want anything they will grab hold of. http://www.houzz.com/ideabooks/query/how-to-hang-a-photo-gallery

Any rod will work that does not have decorative finials. A U shaped rod. I would prefer sheers and drapery that go to the floor. But you can use what you have also. A roman shade can take the place of the sheers and mounted inside the frame. You can use ring clips for the drapes for easy opening and closing. Thank you for the new photos.

The blue is awesome (grey is too trendy)! The reason it stands out to you is perhaps because it's the only real colour there. Bring in the blue in a window treatment, a small appliance that sits on the counter, a pretty tray or area rug. Also, it is more appealing often if there are more than 2 colours - so right now you have a white and blue colour scheme - bring in red or orange or fushia - something from the other side of the spectrum (like you did with the yellow flowers but in a more permanent way)!