I like that idea of rebuilding the fireplace, but if that's not in your budget, I'd build cabinets with doors where the TV is. And I'd make the cabinets coordinate with the fireplace mantel. And, I'd also change the tile around the fireplace.

I know the picture is blurry but the tile around the fireplace is an old world hand painted travertine. You cant see it in the pictures.

^ The fireplace surround travertine colors look too cool in tone with your warm walls and floor...what are the black diamonds below the fireplace (I think that's making me think more contemporary)?

they are actually rusted metal medallions. Dont look at the wall colors or decor... that is all being changed. It was very Tuscan but is now being changed to an updated old world look. I just had my cabinets painted a light gray and my island is turquoise. Im leaning towards changing the yellow walls to a gray color and then my accent wall which you cant see is in a turquoise color. So that is all going. Just cant decide what to do with this wall. Other people who have the same house just trim it all out and it looks great but I wanted to do something more original and unique. I dont want to look like them. Im also leaning towards getting rid of the fireplace all together. We live in AZ and its been used twice in 12 years. If I remove it then I would have a bigger area to work with. Just not sure what all is involved with removing a gas fireplace?? I found this entertainment center... which I love but its $12,000 dollars... I was hoping to not have to spend that much.

Here are some updated pictures. the only thing not right is the back splash is gray and black...no yellow.

Yeah, I would paint the walls out a light gray. That faux yellow Tuscan finish has to go.
Don't rip out the fireplace. It's good for resale if you ever sold the house. Remove the mantle and mouldings and just buy a large entertainment center and put it in front of everything.

Can't afford that beautiful piece of furniture you want. Then fake it til you make it. What I mean is buy molding that is similar to the cabinet piece and add it above your fireplace and cut outs. Frame out the cutout and fireplace with fluted wood stripes. I don't know if you can take off the mantel so it flush with everything else. Then maybe faux doors on the sides. What I'm saying is turn your wall into this piece of furniture.

I would redo the fireplace with Ledgestone drystacked stone and a liimestone hearth. Your artwork can go above. I would make solid shelves inside the hole, have the tv raised higher and have someone build rustic cabinet doors that open and can slide into the sides when watching tv. You could have the cabinet painted a distressed look.

Do you have any pictures? It sounds interesting.