If you go to a place that sell's art and drafting supplies, the special pens they sell are said to be better than Sharpies. Sharpies are only useful when you need the ability to use alcohol to erase something. You might use the Sharpie to do the basic layout, and then trace over it with something better.
I don't recommend diluting the etching solution, because you can reuse it. The only reason to dilute it is if you dump it down the drain after each use, and there's no good reason to do that.
The toner transfer method is very
tricky to get right if you use a regular iron. You either end up smudging the toner, or it doesn't stick properly so it peels up off the board. They'll sell you a $300 lamination machine that gives you the proper temperature, heating time and pressure, but for that much money you can get a high-end photo etching setup complete with a heated etching tank with aggitator and a UV exposure lamp. I just started doing photo etching and I love it. It's the only way to fly, IMHO.
I recommend getting your supplies at Circuit Specialists
. Their prices are lower than anyone's, and I especially like the fact that they have multiple brands of supplies, so you can choose what you like. Most other places stick with just one brand (usually MG Chemicals). I bought the $40 thin etching tank. It uses less etchant than other setups, and it's a lot chaeper than the MG etching tank. I did get the MG exposure lamp kit, though...that's worthwhile if you want fast (10 min.) exposures.