Yep, you got the good bacteria right, Sybercat! With an ammonia reading like that, doing daily water changes to lower the ammonia is important for the health of your fish. Ammonia and nitrite are both lethal for a fish, some can stand more of it than others though. If you could get a water conditioner like Prime, that would help your fish as well.
What Prime does is convert the toxic ammonia into a non toxic version - it can't do as much damage to your fish, but is still available in the tank so that the bacteria can further develop and grow. Without ammonia no good bacteria can develop, thats why its so important to have ammonia in the tank during cycling. Kind of counterproductive, hm?