Tim gave a good description of digital zoom. I would just add that it's something you could just as easily do with a photo editor afterwards. The difference is that the camera can do it before compressing which SHOULD make for somewhat better quality.

Speaking as a programmer (but not much of a photographer), my opinion is that digital zoom is of questionable use to start with and anything more than 2 or 3 times over the optical zoom is probably worthless. A camera that has 8X optical zoom and 200X digital zoom is 10X marketing smoke.

Like Tim said, better glass is the most important thing. I'd take a camera with 10X optical and no digital over one with 8X optical and 10,000X digital.