This was a fireplace and not a new set of logs that you put into an old fireplace, correct? Vented or unvented? Older gas logs retro fit into fireplaces sometimes did this to the surround if the vent wasn't open enough.

The second picture is the way it looks currently. Shiplap is on the walls on either side of the windows now. She wants to repaint the walls too. She tried going from gray to white- not loving it!

Thanks everyone for your suggestions! M Brown, I didn't think about the TV being over the fireplace. It is a working fireplace, but we never use it, so that shouldn't be an issue. decoenthusiaste, our adjoining space is a light smoky blue, and I agree, the blue and brown look great together. We are still playing around with colors but haven't found that "wow" combination. If anyone has thoughts on what to do with those bump-out areas, please let me know. Thanks!

Finally finished the fireplace!! I think it's a big difference.  Any comments?