I took some pictures but didn't know how to post them here so I loaded them at photobucket. I hope you can see them. The description of the pics are...
#1 and #2...fireplace insert overhang..something I am okay with if the other problems are remedied

#3...lower vent cover on hearth

#4...upper hole above mantel..the lower ones look like this behind the vent covers.

#5-#7...overall view of vents and holes...uggh

Here is a link that might be useful:

The holes are the least of your worries.

I'd bet you that this insert isn't installed properly and your chimney has glazed creosote just waiting to be ignited.
You need to remove this dinosaur and do something right with this situation.

Have you had a professional chimney sweep come out to clean and inspect this? If not, you need to do so before you ever use it again.

I do not see any pipe going out through the ceiling as you state. It could be that you are talking about seeing pipe coming out the roof to the exterior. If this is the case, then you have a cheapie pre-fab fireplace. This type of fireplace CANNOT handle this insert. This insert was designed for a masonry fireplace over 15 years ago. Most likely you have major damage to not only the fireplace, but the chimney pipe as well, not to mention pyrolysis of the house framing.

You have a tragedy just waiting to happen. Don't use it anymore!! Call a certified chimney sweep ASAP!

Here is a link that might be useful: Trouble with inserts

I don't know why the link won't work.
Try copying and pasting this one:
http://www.safesidechimney.com/woodstoveold.htm

Xanndra, thanks for the help. Yes, I assumed that we don't have a real chimney since there is no evidence of it outside the house or from the roof but instead a pipe and cover coming out of the roof. In the link you posted, there seems to be a chimney. Should this always be the case even with inserts? I am sorry that I am so clueless but we have never had a fireplace before. We bought this house last year and like I said, only used it once then. No,we never had it cleaned.

If I should remove this, then is there some other way to get a fireplace or insert installed that isn't going to cost a small fortune? We don't have gas in this area and I would prefer wood anyway. I don't mind buying a new insert but I assume now that I have to have a real chimney, right?

The expected life of a pre-fab is 15-20 years. Most likely the entire fireplace will have to be torn out and replaced. Your best bet is always a freestanding wood stove. All inserts need to have a stainless steel liner attached all the way up the chimney as the link shows. Most pre-fabs only use double-walled pipe. This pipe is not sufficent for insert or wood stove usage. Again, most likely it is damaged and should not be used.

The only way to know is to have a professional to come out and inspect it.

"The expected life of a pre-fab is 15-20 years"

Xandra or anyone else who might know ...

What amount of use are you factoring in when you say that the expected life of pre-fab is 15-20 years? The pre-fab that I have was not used at all in the past 17 years. The original owner lived there for 3 or 4 years and I can tell that she DEFINITELY used it. That would have been from 1981 - 1984.
I have had it checked twice and swept once (I haven't used it yet), and although it looks WELL USED to me, both of the inspectors said it was fine. One of inspectors I asked to look at it for a possible replacement, but he said I didn't need it.

I would also be concerned about the fact that it looks as though there isn't a hearth--that is, non-combustible floor in front of the stove. That's likely illegal, and certainly unsafe. In my area, you must have at least 16" of stone, brick, or concrete in front of a stove or fireplace. That's so sparks or embers jumping out of the firebox don't set the carpet on fire.

I'm in a somewhat similar situation--I bought a house this summer, which has a fireplace that used to have an insert. Apparently it was either installed wrong or before they knew about the issue of proper flue size. Anyway, we had someone out to clean it several weeks ago, and learned that the lining was all cracked and had hardened creosote all over it. It'll cost a couple hundred to get that cleaned. Since the lining cracks make the fireplace unusable as is, we went ahead and ordered a wood stove. Freestanding. We do have adequate hearth (2') but might have to enlarge it a bit for the stove.

Now is NOT a good time to be looking to buy a wood stove. People are panicking about fuel costs, and are flocking to buy wood, coal, and pellet stoves and inserts. Retailers are running out of stock all over. Even the place we bought from, which keeps a lot of stock, was starting to sell out. My advice would be that if you *don't* need to use your fireplace for heat, then spend the winter researching stoves, chimneys, and what they cost (and maybe saving up for it), and then next spring, when the panic has died down and the stove and chimney guys aren't busy, start the ball rolling on getting your fireplace fixed up. The manufacturers should have ramped up production and the shortages should have eased by then too.

Meantime, cover the vents w/ something decorative.

PS--if your chimney really is no good, there are stoves that vent right out the wall, so you might not need to build a whole chimney.

To pdg777:

Obviously I meant 15-20 seasons of cumulative use.
They don't self-destruct just by sitting there.

Xandra:

Yes, I know that's what you meant. However, what I am asking is, when you say 15 or 20 years (or seasons of cumulative use), I assume you meant 15 - 20 winters of use. But how much use per winter are you factoring in giving that life span of the fireplace? 1 or 2 fires a week for 15 to 20 weeks pers year? 1 or 2 fires a month for just 3 or 4 months? What I'm basically trying to figure out here is how often I should use it per season if I want it to last, lets say, another 5 years or so.

Well, about the only thing I can say is that these specific types of fireplaces are NOT built to withstand hot fires for long periods of time. They were built for the small, occasional fire. Personally, I don't think they are safe under any circumstances. Most are not even installed properly, which is why I don't use the one that came with my house. It is merely a ledge on which I place my plants on.