To get a more diffused look, you have to A) get it off camera, B) use modifiers (umbrellas, softboxes, etc), or C) Bounce it. If you simply get a flash and put it on top of the camera and use it in lieu of the on-camera flash, you get more powerful light that is just as harsh or worse.
On-camera flash mods (lumiquest soft box, etc) while the flash is attached to the hot shoe offer some diffusion, but it's still not great.
I started with a 580exII and used it on-camera bouncing it off walls and such for a while using its ETTL-II mode to help expose the shots. I have white walls and ceilings, though.
Bouncing is great but its major disadvantages are that you need something to bounce it off of (high ceilings, outdoors, are out for the most part) and any color on what you're bouncing off of will color cast the image.
Personally, I found it a great way to start, but it's not for everyone and the 580 is expensive. The 430's a little less pricey but can do many of the same things.
ETTL-II takes the thinking out of 90% of your flash in most situations. For me, it was a great learning tool. After about 4 months, I abandoned it and went full manual with my flash settings (well, ETTL was no longer possible at that point due to radio triggers... but that's another mess).
Here's a disgustingly confusing (but thorough) explanation of ETTL-II and Canon EOS cameras:
Flash Photography with Canon EOS Cameras - Part I.
For other inquiries, you may find some of your answers in Lighting 101 and 102 on the strobist website:
Strobist
Personally, in a flash, I wanted a high guide number, I wanted something that would fit me in many situations (on-shoe, off-shoe, ETTL-II, ETTL controller mode), and I wanted something that would serve me until it needed to be replaced rather than upgraded. Once that part of my gig bag was set, I went to monolights for studio work and sunpak strobes for more strobist type work.
