Wow, that mantle looks classy, I'd surely hate to recommend painting it but it has been done for a lot of years and is surely according to ones personal tastes. What you want to do has a classy traditional look to it. I think, from my looking at a lot of older homes with the look you are after, you shouldn't have many issues doing what you want. On most that I have seen where the fireplace gets used, I've seen some discoloring where a small amount of smoke may have escaped from time to time.

Thanks Windslam. I'm painting over the old mantle in the interest of saving money.

I can easly do the wainscoting. It's not that hard. I'm just worried about code violations with putting it up as I'm thinking. The only code information I can easily find on fireplaces only stated that a distance of 6 inches from the top of the fireplace opening to any combustables must be mantained.

Since my fireplace has those vents above the fireplace, I think I'll be safe. I'm just here trying to assure myself of my own thinking :)

If worse comes to worse, I'd buy a longer mantle and put the light tile (the ones laid out on the hearth) around the fireplace with my wainscot design on the outer edges of the tile.