I looked for one and found Camera Zoom from Kenditech which we covered last April. The problem was that it wouldn't work with OS 3.0. I did find a few apps that I thought would help like Zipix Lite, which purported to zoom, but really only enlarged and cropped the picture giving me less than acceptable results.
Picture taking on the iPhone has just gotten better with the release of Camera Zoom 1.1 which plays very nicely with OS 3.0. It provides up to a 4X digital zoom; not as good as an optical zoom, but not bad at all.
The app gives you a slider bar that zooms in and out, or optionally uses the whole screen to zoom by sliding your finger across the screen. The same goes for the shutter, which allows you to tap anywhere to take the picture. This can get in the way of the autofocus box, but can be turned off. Camera Zoom 1.1 also gives you the option to reduce the size of pictures to 320X480, the native resolution of the iPhone screen. I recommend this setting since the improvement is dramatic.
If you have an iPhone 3GS, you will get more functionality out of your camera with Camera Zoom 1.1. I haven't tested earlier cameras, but I can't see why it wouldn't be great for those as well. Spending 99 cents for this app is a no-brainer. It's one of those things that just should have been built into the system.
The proof of the pudding is in the eating, so take a look at this gallery and see for yourself.