For TTM details, see this post by Snorvich. It is actually very easy to do and I have had great success with this method.
http://reefcentral.com/forums/showthread.php?t=2388428
But to answer your questions directly.
1. So during TTM the water should be cycled? - No, The fish is only there for three days. Use freshly made saltwater and then just toss when you move the fish to the next tank.
2. Do you have to acclimate the fish every time you transfer. - Any time you move a fish from one tank to another you should make sure the temp and salinity are matched. I always set the next tank up the night before so the water is the same temp as the current tank.
As far as keeping multiple butterflies, it is recommended to keep only one per species in most cases, but multiple different species can co-exist in the tank is large enough.
Along with the Pakistani, I have a Declivis, Dot-Dash, Vagabond, Yellow Longnose, Heniochus and Yellow Head in my 350.
My tanks get a variety of foods. Ocean Nutrition Red and Green in both flake and pellet form as well as Nori from the supermarket.
I use San Francisco Bay frozen Mysis, Brine, Carnivore Cuisine and Angel & Butterfly cubes.
The Pakistani really likes the A&B cubes and devours clams on the half shell.