Werkzeug in General, and in Python 3.1
I haven't used Werkzeug, so I can only answer question 2:
No, Werkzeug does not work on Python 3. In fact, very little works on Python 3 as of today. Porting is not difficult, but you can't port until all your third-party libraries have been ported, so progress is slow.
One big stopper has been setuptools, which is a very popular package to use. Setuptools is unmaintained, but there is a maintained fork called Distribute. Distribute was released with Python 3 support just a week or two ago. I hope package support for Python 3 will pick up now. But it will still be a long time, at least months probably a year or so, before any major project like Werkzeug will be ported to Python 3.
I've been looking really hard at all of the way**(s)** one can develop web applications using Python.  For reference, we are using RHEL 64bit, apache, mod_wsgi.
History:

PHP + MySQL years ago
PHP + Python 2.x + MySQL recently and current
Python + PostgreSQL working on it

We use a great library for communicating between PHP and Python (interface in PHP, backend in Python)...  However, with a larger upcoming project starting, using 100% python may be very advantagous.
We typically prefer not to have a monolithic framework dictating how things are done.  A collection of useful helpers and utilities are much preferred (be it PHP or Python).
Question 1:
In reading a number of answers from experienced Python users, I've seen Werkzeug recommended a number of times.   I would love it if several people with direct experience using Werkzeug to develop professional web applications could comment (in as much detail as their fingers feel like) why they use it, why they like it, and anything to watch out for.
Question 2:
Is there a version of Werkzeug that supports Python 3.1.1.  I've succefully installed mod_wsgi on Apache 2.2 with Python 3.1.1.
If there is not a version, what would it take to upgrade it to work on Python 3.1?
Note: I've run 2to3 on the Werkzeug source code, and it does python-compile without 
Edit:
The project that we are starting is not slated to be finished until nearly a year from now.  At which point, I'm guessing Python 3.X will be a lot more mainstream.  Furthermore, considering that we are running the App (not distributing it), can anyone comment on the viability of bashing through some of the Python 3 issues now, so that when a year from now arrives, we are more-or-less already there?
Thoughts appreciated!