I started an application in Google App Engine right when it came out, to play with the technology and work on a pet project that I had been thinking about for a long time bu
I think the first option is considered the best practice. And make the code folder your first package. The Rietveld project developed by Guido van Rossum is a very good model to learn from. Have a look at it: http://code.google.com/p/rietveld
With regard to Django 1.0, I suggest you start using the Django trunk code instead of the GAE built in django port. Again, have a look at how it's done in Rietveld.