the target option only apply to the .zoom plugin not the .colorbox so you need to set the target in the .zoom call like this
$(document).ready(function(){
$('#target-img').zoom({
magnify:2,
target:$("#zoom-window").get(0)//target need to be the html element
}).colorbox({href: $("img",this).attr("src")});//you can chain the colorbox call
//get attr src of the img inside the target-img
});
to get the src of the img you need to get the actual img inside the #target-img div and to retrieve the src you need to use .attr
http://jsfiddle.net/MFrV3/15/