" have about 3 layers of paint sandwiched around a couple layers of
wallpaper, and then I seem to hit a brown grainy sandy layer which I
think is as far as I should go- or am I going to far?"

The brown grainy sandy layer is where you should STOP! The house was never plastered with a finish coat, they stopped with the next to last coat and either painted or papered over it.

After you get all the paper off, you can patch the dings and skim-coat the plaster. But do not use drywall mud, use a real skim coat mix. Drywall mud dissolves if it gets wet.

Thanks. What about the red stains that appear in the brown layer- is this residual paint that should be removed or something else? Should I try to remove it or sand it down before the next step or just leave it alone?

I would prime over the red stuff(whatever it is) with Cover Stain

If it's paint, cover it with a good stain-blocking primer after you patch holes and cracks.

like cover stain?

For that reddish stuff, which is often an iron oxide pigment (barn paint) that soaks into latex and bleeds through almost anything, I'd use the KILZ original formula white alcohol-based shellac.

Shellac over the skimcoat or the other way around? Thanks.

Shellac over the skim coat, AFTER patching the holes and cracks.

As far as I know Kilz does not make a shellac based primer, the original oil would work, none of their other products would.

My mistake ... it's the BIN sealant. YOU need to have good ventilation, but it seals in al;most everything.

http://www.homedepot.com/p/Zinsser-1-qt-B-I-N-Shellac-Based-White-Interior-Spot-Exterior-Primer-and-Sealer-00904/100398380

You can expend a lot of time and effort to get a mediocre result or you can remove all of the lath and plaster, insulate where appropriate, upgrade the electrical and install new drywall preferably blue board (veneer plaster).

If you spend the time you can great results with restoring plaster, but its a tedious job at best. However, you will also get satisfaction from doing a restoration instead of a demolish and replace.

Different plaster techniques and final coats were used over the years and like any other job it depends on the quality of builder. Plaster coat thicknesses and the quality of the final finish will not be consistent. In some cases they also used a final finish over the plaster that looks like lightweight wallpaper, so that they could get a smooth wall for the visible paint or wallpaper.

If the final coat of plaster is uneven/thin and you are exposing the brown coat, there is a lot more restoration work required for those areas. If its in that condition over a large area, it might be better to remove the plaster and replace with drywall or blue board. Just remember that plaster is very heavy and dusty during demolition, so its not a simple job either. I had one piece of plaster ceiling that came down suddenly and was heavy enough to snap the wood window sill off the window below it.

Bruce