http://youtube.com/watch?v=1l4Jd1bu3pY
This video shows an example of desensitization and counter conditioning. The key to D/CC is knowing when your dog is sub threshold (alert, but attentive to you), and over threshold (non respondent to you). I suggest getting a certified professional to help you point out when your dog is sub/over threshold.
When they're in the house, the dog looks as though she's over threshold, but Sophia was doing some simple classical conditioning (dropping treats when the dog stopped lunging and growling). When they went outside, they added enough distance so that the owner could work with the dog on simple behaviors. Over time, perhaps weeks, that distance is narrowed as the dog becomes less reactive to the person.
What helps this process along is abusing NILIF, working on attention cues, and working on your dog's impulse control.
Otherwise, you should manage the dog...keep him in a crate (I know you'd have to move a box car in the house), but that really is the better option over others IMO.