I think you could gain a LOT of storage space with different cabinets. First, run them all the way up to the ceiling. A full-depth cab over the fridge will give you tray and cake pan storage.

Some people don't mind a lower cabinet over the sink.

A smaller DW and smaller sink base will gain you a few more inches - perhaps you could do a fancy blind corner apparatus on the sink side, and move the range over to the right.

As for pantry - your garage might be your best friend. Before our kitchen remodel, we had shelves in the basement that served as pantry - it's where we kept items we bought in bulk (cereal, rice, soup, pop). It wasn't terribly convenient, but not the end of the world either. I built shelves above the door in my garage - I can only get to them when the door is closed, but it's wasted space otherwise!

I think you can work with what you have and save the cost of cabinets. I love the idea of raising standard height cabinets to the ceiling and adding an open shelf below like this kitchen by Anne Turner at Urban Grace Interiors blog.

To make the most of the existing base cabinets you could install some Rev-A-Shelf organizers

Here is a link that might be useful: http://urbangraceinteriors.typepad.com/the_blog/2009/01/a-kitchen-intervention.html

A banquette in the corner could be a good use of space around a small pedestal table and provide storage. There are a lot of examples online of people building their own flip top banquette seats or using stock kitchen cabinets.

Look at www.apartmenttherapy.com, especially their kitchens and the small house contests. I personally wouldn't rip out what looks like perfectly good cabinets.
I wonder if you could do something like this:

Here is a link that might be useful: raise cabinets and add shelf

I think a lot of this depends on the market where you are and what your other options might be. There are surely fixes to this kitchen that would allow more storage space. And you might be able to carve extra food storage spaces in the garage or elsewhere. If the food storage is the only issue keeping you from this house and you love the house, then I think it is workable. But, have you seen other places that you like that have better storage?

It does seem like a crazy cost to get new cabinets as these look fine. But, you really could get SO much more storage if they went all the way up to the ceiling. I think the examples above of moving the height up and adding a shelf are cool, but I doubt they get you as much extra storage as you would have with taller cabinets. Plus, because the living and kitchen space is combined, I wouldn't want to have as much kitchen stuff visible on open shelving. Have you priced out getting just new uppers?

Also, I bet there are a ton of great storage ideas for the space to the left of the cabinets by that table.

The entry hall seems not too narrow. Maybe you can have a foot deep, full height cab on the wall next to the fridge for storage.

Is there enough room to do a floor to ceiling pantry, maybe only the 12" deep of the regular cabinets, on the clock wall?

I also wouldn't replace the cabinets if they're in good shape. What would stop you from having them painted? It would brighten up the place.

You could also do a built-in wall unity on the TV wall. It's recessed enough it would take some nice shelves, perhaps using kitchen cabinets as the base.

This looks like a very nice little place. Actually, the pictures don't look little.

I'm going to differ from what most people are saying in terms of keeping the cabinets. I say that if your budget allows, I would ditch the old cabinets and start fresh and look for a frameless cabinet (IKEA's are if that's budget friendly for you) - in smaller layouts, those extra few inches can make a big difference.

Our previous house out in Vegas was just a hair over 1,200 sq ft, 3bd, 2 1/2 ba, 1 car garage. It was a compact house, but "lived" larger than what it really was thanks to a garage where our washer & dryer lived along with the hot water heater, and storage shelving units (obviously, due to the heat, anything that wouldn't fare well in +100 degrees didn't go out in the garage). Also, it had a large "closet" downstairs that was situated under the stairs - that worked as our coat closet and more storage (the kitchen garbage can went in there along with our vacuum and lesser used kitchen cooking items).

Someone mentioned going with a smaller DW, but I'd suggest against that. As a family of 4, I'm imagining that your DW gets a pretty good workout if you cook a good bit and have 4 people in the house.

Running cabinets up to the ceiling is an excellent way to gain some additional storage. And don't hesitate to get an additional shelf for uppers if you don't need all the "breathing" room between each shelf. All of our uppers will have 3 shelves in them. If you look at most uppers, many people have a large amount of space in between the shelves that isn't really needed and they could create substantially more space with just adding an additional shelf in there.

I think that I've read on the IKEAfans site that some people have hacked the IKEA cabinets to make toekick drawers which can give you more needed storage space.

And I would definitely consider getting a deep cabinet for over the fridge to give you the area to store cookie sheets, baking pans, etc.

It looks like you could run a banquette in there...I've seen at the IKEA store where they took some of the cabinets and put them together to make a seating area - so it works as both seating and storage. Banquettes can work quite well also as a way to have an eating are that takes up less overall area.

Looking at it, I think there's a lot of good possibilities for the house. I don't think that you are ever going to consider it a large house, but it might be considerably more "livable" than you imagine with it's square footage if it's been designed well to take advantage of the space.

Above I suggested using the existing cabinets, however, others have made good points about the benefits of new cabinets making the most of your space. I felt like playing around in the Ikea kitchen planner tonight and I was curious to see how much yours might cost.

So I assumed all the dimensions, obviously, and came up with a 14' x 10 '6" area in the sketch below.

In this configuration, The kitchen cabinets, banquette area cabinets and numerar countertops (no handles, fixtures or appliances) are almost $2200 for Applad white doors and drawer fronts (almost the cheapest option, I think.) Just the kitchen proper (not including the banquette area) is around $1700 and without the Numerars the cabinets alone are around $1390. Of course, this is just a big guesstimate.

If you're handy you can definitely assemble the cabinets yourself and if you're determined the install is doable as well, but you'll probably need help lifting the wall cabinets onto the rail.

We put in an ikea kitchen in 2006. What started out as just wanting new floors and getting some "cheap" ikea cabinets blew up into a major kitchen renovation way beyond the basic update we were woo'd by. Ikea kitchens are a slippery financial slope sometimes.

One note about the full-height cabinets - It looks like you might have a light fixture above your sink and so you won't be able to have a cabinets with doors go all the way to the ceiling there.

I think townhouses are great. Good luck with your home search.

I would vote for new cabinets as there is only one drawer in the current base cabinets. There's a great need to redesign the kitchen just to add drawers. The sink needs to be a smaller single bowl. I had considered the 18" Miele dishwasher and believe it holds almost as much as a 24" dishwasher. That's an expensive option but you're trying to gain function. If the range is moved to the right, consider putting a narrow pullout pantry between the fridge and the range. Many other great ideas already provided here.