LMB,
I can't really tell you how to overcome this, I'm still figuring it out myself but I can share what we've been doing and how it has worked...
Bruno is doing the same thing at about the same age as Chi. Like you, I'm a stay at home mom and take Chi with me just about every where I go. Since she's been a super young pup, she's been nervous around strangers and would do what Holly does (try to back behind me when someone approaches).
She did the same thing in the car and OMG it was a pain in the butt. We took many a short trip around base to just sit in crowded parking lots to get her past that

And she's much better now, people can approach the car and talk to me now, the gate guards can reach in the window for my ID and I won't have to worry about them pulling back a bloody nub
One crucial mistake I made was to do so much of her training and socialization away from the house. Even after the "I'm gonna eat the guy" incident about 2 weeks ago, I can still take her to a public area with no worry; it's her home neighborhood that's the problem. Learn from my mistake! Take every opportunity you can now to teach him how he's supposed to act outside.
I've done what Micdobe and DandD have suggested. I had great luck in encouraging her to eat treats off of the oddly shaped tree that she about had a heart attack over but seem to be making the most progress with just ignoring stuff. I'm working on firmly establishing myself as the leader (I think too much coddling early on when she started reacting like this hampered that a bit) NILIF is working so well with that. The theory is that as long as she knows I'm the leader and that I have everything under control, she has nothing to worry about and therefore no need to aggress - seems to be working very well so far. Think about it if you were walking down a dark, spooky alley at night with a 3 year old, you'd be much more defensive and scared than if you were walking down that same street with a line backer - but if something did happen and push came to shove, you'd react if you had to - That's where I want Chi.
Get the book Culture Clash by Jean Donaldson - read it several times (won't be a chore, it's a great book). If you aren't already, start working closer to home as well as out about the town. Pick a day where there will be high traffic on your street, put the leash on Bruno and start working obedience with him (you're class will give you plenty of homework, I'm sure

. I've also found that the more excited I get (either nervous that she will aggress, or happy that she's done well) the greater the chance she will react. I keep everything as nonchalant and low key as possible. Corrections are quick, I do not dwell on them and have gotten timing down to a science - Rewards as just as quick and calm - a calm and sincere "good girl" or a tidbit calmly offered (not tossed in the air, which is what I used to do, but that just puts her over the edge with excitement). I have the best luck if she's a bit worn out when we start working on stuff. I take her to the field next to our house, run her through a few commands and then launch the frisbee until she's panting pretty hard and then it's time for a walk and more training.
Consistency is the key. You might find different methods work better for different perceived threats but the important thing is that you remain consistent with your work. Just because he'll let a stranger walk up to your yard one day, doesn't mean he'll allow it the next day. I've learned that this is very much a process.
Here are a few links that have provided me with very valuable information:
http://www.clickertraining.com/trai.../index.htm?loaditem=click_to_calm_stress_cues - this page offers two clicker training exercises that we work with to build her confidence and keep her attention on me.
http://www.flyingdogpress.com/attitude.html - this article deals more with blatant aggression as opposed to fear aggression (which I believe both our dogs suffer from) but it is very interesting.
http://www.flyingdogpress.com/probtips.html - full of stuff that we already know but great reminders
Okay, rather than list every link to every article I love on this site, just go to
www.flyingdogpress.com and read everything
Good luck, keep up the good work - obedience classes will help in building his confidence and exposing him to different situations and it's a lot of fun
*** edited to add ***
Just telling Chi "no" is useless. She is very much a thinking dog that needs a job. I do still tell her "wrong" but then redirect her to something else, "sit/stay" "heel" even follow the frisbee (I keep the frisbee in my hand and move it around, she has to keep her attention on it and we've actually gotten to the point where she will weave between my legs

If we're walking and I see someone or something approaching that she will more than likely react to, I change directions quickly with no warning or cue to her. I know people think I'm nuts when they pass us and I'm walking circles with her - but it's teaching her to stay focused on me, not what is around her so much.
My attitude either makes or breaks our training. If I am stressed or reactionary, she will be too. When I am calm and not completely focused on her, she's the same. This little tidbit has only come recently. I've noticed how much better behaved she is when Jordan and Petri are walking with us. But when Jordan is with us, I'm talking to her and cutting up and not obsessed with Chi. I'm much more relaxed and positive and that attitude travels down the leash.