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@h2o
I bought a compact after owning an SLR for a while because I began to love having a camera with me but was never comfortable carrying my SLR riding on a bike - insurance doesn't include 'participating in sports' or some similar legal nonsense.
It's great for candid street photography. But I still make a point of lugging the SLR around regularly, though I find I only do when I have assigned myself a specific photo project for the day...
Back on topic - the Nikon vs Canon thing is a bit dull. I own a Nikon, love it, would probably have loved Canon if I'd bought one of them. Nikon just happened to be the brand I borrowed from a friend for a few days a few years back when I was thinking that I wanted to get back into taking photos. They're much of a muchness.
Re lens quality. You won't notice at first, but you will eventually notice the difference between a cheap kit lens and a decent lens. Your wallet will also notice the difference if you buy a high quality zoom. I'd suggest buying a cheap decent prime lens to go with the normal zoom that comes as standard. Both Canon and Nikon do a great, fast 50mm lens for under £100. The optics are very good despite the low price - 50mm lenses are easy to make, apparently. A fast 35mm tends to cost a bit more, but may be better on a digital camera (lenses are about 1.5x 'longer' on a digital camera than they would be on a film camera, because the sensor is smaller than a negative 35mm is roughly approx. to a 50mm lens.) Having a fast prime will allow you to do more low-light work without a flash, which is often fun.
On flashes - you're better off getting a mid-range one rather than the cheapest, if only because the cheapest ones tend only to point forward and up - which is a bugger if you want to bounce the flash off the ceiling while holding the camera sideways. Don't bother getting the same brand as the camera, it's not a lens - a compatible Sigma flash will work just fine and cost about 30-40% less. It's generally not a good idea to buy flashes second hand, though: if it's had heavy use the capacitors will be buggered and you'll end up having to replace it sooner rather than later.