Hi Gordon,
I have to disagree with Zone but only a little (sorry mate

).
I would go flash first but, and here is the pinch, to get candids it is much easier to do so without a flash popping away as it sort of give away you are taking shots and everyone will be looking for the flash. Now the reason for disagreeing with Zone is that the 350D will try and pop the flash most the time if you are on any of the creative modes indoors. The only way to get away without the flash would usually be to go manual, use a high ISO, a fairly large aperture and I believe you can disable the onboard flash in the custom menus. High ISO brings noise and you are limited to aperture by the specs of the lens. If you are going to have to use a flash then it will be a marked improvement to use an external flashgun. If you are going to use flash then the chance is you will only get one 'take' with a shot as you will then be spotted and the candid will not be able to be retaken without the subject(s) reacting. You don't have to use the flashgun if you don't want too. If you keep it attached but turn it off the camera will not use the onboard flash or the flashgun.
The flashgun made the biggest improvements for me at a starting level.
The nifty fifty would be a good choice but the quality difference may not be as big as you would expect considering the reviews. For £60 or so it is a no brainer but will not make quite as much difference as the flashgun.
Raw is the way to go especially if you only have one shot at each candid. Any settings that are not too far out can be tweeked.
Memory cards depends on how happy you are with the shutter release. I would tend to go for a couple of cards (1GB minimum) as you don't want to run out on the day.
Cheers
RB