Thought I would come back and update, as you were all kind enough to offer advice.
We took the shelving units and placed them sticking out so they cut the room in half. Much better, and far less overwhelming. We bought some hideous bright carpets, chosen by the children.
We made a den corner with a tent roof and lots of lovely cushions, and their huge soft toys - they LOVE this bit and use it all the time. We put an old cd player in there for them.
We made an art corner with an old red desk, and bought a new swivel chair, so everything is there if they want to paint or draw or do crafts. So far they have used this very responsibly.
We put the puppet show and the dressing up rail near the den corner so if they do a show the audience sits on the comfy cushions.
We put all 2yo ds's trucks and garage and stuff in the little alcove as you come in, so they are all down low and easy for him to get to.
We have put up some pictures and wall stickers. We hung things from the ceiling.
We also took LOADS of stuff away and are storing it close by for rotation.
I am going to get them a nice big cork board or magnetic board for putting up their pictures.
It is so great and they love it. They use it all the time now.
