Then, can you explain why I am getting great pictures with digital zoom?
Because you are a good photographer to start with.
All digital zooms are is in-camera cropping. That's it, nothing more. When you use a digital zoom, you effectively are just pre-cropping the picture... you would get the same effect by simply enlarging them in photoshop, plus you would get more control.
No optical resolution increase is gained by using a digital zoom, they just don't work that way.
The only advantage they have is that it does its interpolation before the camera software applies compression. With a 10 megapixel camera set to low ISO this is not much of an advantage... and it is offset by the fact that you lose flexibility that you would otherwise have when cropping during post processing. Additionally, with digital zoom you simply have to accept whatever interpolation the camera sticks on there, whereas if you REALLY want to blow something up you can do it with software in PP that allows you to control exactly what type of interpolation is employed and where it is used (Alien Skin Blow-Up, Genuine Fractals, etc)...
Here's how Kodak explains it:
What is digital zoom?
Digital zoom crops your image and magnifies the result of the cropping. This magnification process is called interpolation. To make the cropped area bigger, digital zoom makes up, or interpolates, pixels to add to the image, which may give less than satisfactory results.
Using the digital zoom allows you to get closer to your subject when you want to be discreet about taking pictures, like at a graduation or a religious ceremony.
Sacrificing image quality to capture the moment is more important than not getting the picture at all.
If you plan to use this mode, purchase a telephoto lens attachment so you don't have to use the digital zoom. Of course, you may use the digital zoom along with the telephoto lens attachment.
Kodak Explains Digital Zoom
Consumer Reports gives their opinion...
And here is more info if you want to get your GEEK on...
Digital Interpolation
Your images would look every bit as good if you didn't use digital zoom and just upsized them (cropped them) in post.