Well - First off - what do you use the room for? Looks like it's half "man-cave" and half kiddie room.
It looks kinda dark down there, (could be the pics) but I'd use that to my advantage. I'd turn it into a bit of an "olde" pub/cottage. Budget with no limits? I'd ditch the drop ceiling for a few extra inches of height, and replace the flourescent fixtures with something brighter and homey-er. Lesser budget? Look into replacing the tiles there with the ones that look like a neat pressed tin, and use copper colored paint to give the effect or a copper ceiling. (I used some similar to these in my bathroom painted a warm brown, they came out looking like lembossed leather) Paint the walls a nice buttery warm yellow, deep and rich, but not too dark. (Or maybe a warm mossy green, but yellow would be brighter and lighter.) I'd also do a tiny bit of faux finishing, make the walls look really rich. Use 2 or 3 similar shades of yellow and mush it all together on the wall for that aged look.
Ideally I'd cover the wainscot with beadboard that I could stain a nice honey-brown. But on a tighter budget I'd paint the existing wainscotting a warm milk-chocolatey brown, and faux it to look either like leather or wood. Whats under the carpet? It doesn't look too bad, maybe rent a shampoo-er while the room is emptied out for re-doing?
I'd leave the fireplace alone, for the most part. Maybe paint out the upper part to blend into the wall, and definately add a nice chunky mantel with room for pictures, etc.
Toy storage can be a pita - I'd build some nice deep shelves across from the fireplace (opposite side of the room) with room for the bigger chunkier toys underneath.
Phew - Can you tell I'm a Trading Spaces addict?
