That's a lovely shot!
The reason that you get hard shadows with flash, is if the light is all concentrated pointing in the same direction, and there is a big difference in the brightness of the illuminated area, and the ambient light levels.
There are two main techniques for diffusing the light - the first is to use something in front of the flash to spread the light source. For the built in flash, there is only one option - that's the 9.99 Lumiquest soft screen. I haven't used one, so don't know how effective it is, but it should definitely show an improvement.
The second technique which isn't possible with the built in flash, is to bounce the light - most commonly off a ceiling, so the whole of the ceiling becomes the light source - you'll often see photographers with a flash pointing up, with a white index card attached - this bounces some of the light forward, whilst most of the light comes from above.
The last technique you could use, is to raise all the ambient light levels - e.g. taking shots in bright daylight - though you can still have the problem of shadows in daylight!
Hope that gives you some insight into things you can do to alleviate shadows - basically, with the built in flash, a diffuser (lumiquest soft screen), and raising ambient light levels are your main options.