Room Layout Help!

So, we've decided to keep our house a little while longer and not put it back up on the market this Spring.  It would be nice to move to a bigger place, but the fish just are not biting right now in the world of realty.  BUT, that's okay, because I've always got lots of projects to do around the house.  And I've made a giant list of things I still want to do (Paint the kitchen, reface the cabinets, tile the shower, etc.).  Scotty, if you're reading this, I know this makes you want to jump off a building, but it will be fun!

The first thing I want to do is figure out our living room situation.  We spend most of our time in this room, so I want it to be comfortable and usable. 


Looking at the front door

 

Looking towards the back of the house


Our house is a small, 1100 sq. foot bungalow built in the 1920s.  It's a "shotgun" style which is long and skinny and you can stand at the front door and see all the way to the back of the house.

I love our chair and coffee table, but the sofa has got to go.  3 dogs have just been too much for the poor microfiber couch.  I would like more seating in this room in general, but have no idea how to accomplish that in such a small space.  Also, we've never really had a proper dining table - just hand me down furniture and folding chairs.  It's okay, because we eat at the table about 2-3 times a year.

So, here are my biggest dilemmas:
1. How can I add more seating in a small space?
2. How can I more effectively separate the dining space from the living space?
3. What sort of dining set would you suggest?
4. How can I bring more light into this room?  The light from the fan make our house look like a crack den, so we need more table, floor lamps, sconces, etc to bring in light.  Should we paint the walls? I'd be okay with getting rid of the stripes, but they were a lot of work, so I'll king of miss them.

All thoughts and suggestions, including links to furniture and paint colors appreciated.  I know there are interior designers out there just waiting to help me out!