Yes it is nice to be able to put your projects INSIDE something isn't it? You know, to hold everything together so it doesn't flop around? Discuss the techniques here!
Would it be a good idea to wet sand Glazing & Spot Putty (the red stuff)? It would be so much easier to sand wet, especially for higher grit sandpaper.
I wet sand that stuff when working on the car, so yeah, use water. Make sure the putty is good and hard first though (wait a few hours after applying) But you shouldn't be using much of that stuff. The putty is for filling in small imperfections. If you have a larger area to fill in / shape then you probably ought to use Bondo.
Toothpaste works amazingly. Not the really super smooth gel-ish stuff, but the more kind of gritty kind. It works like very very fine wet sanding and makes it shine.
Current projects:
Ultimate N64 Guide
N64 Portable (x2)
NES Portable