socializing two dogs

Question
I am taking care of two dogs that have previously belonged to the same household.  Yes I know they aren't technically my dogs but I am fostering them and for the foreseeable future am responsible for their behavior, training and safety. Their owners had one 3 year old female Chihuahua and decided to get an 8 week old male German shepherd puppy. Unfortunately they did not introduce their dogs properly.  They assumed their little dog would be ok with the puppy, since she has gotten along with most other dogs in the past, so they allowed them to interact unsupervised/uncontrolled which led to negative experiences which of course only "got worse", as the puppy had no idea how to act with a toy breed and I suspect the little dog wasn't all too happy about the intruder and his attempts to wrestle.  Now the German shepherd is 4 months old and quite large.  I am trying to reintroduce them so that they will be more comfortable around each other and at least tolerate/be relaxed together. I have been allowing them supervised interaction with the puppy on leash and tried to reward them for being close and remaining calm and they did ok at first but now they appear to be getting worse.  Now the Chihuahua is getting bold and antagonizing the puppy while he's on leash, occasionally running up barking and showing her teeth to him, and the puppy is getting anxious and frustrated on leash and overexcited by the little dogs excessive barking. He's adopting her craziness in the yard as she is also a territorial guarder since the backyard is bumped up against a park trail with lots of foot traffic. Ugh. I have an inherited a fine mess of behavior problems. I know that the Chihuahua needs basic obedience and work on the excessive barking but I'm not sure what to do about their relationship, her antagonism and dominance towards the puppy and his reactivity. She seems to view him as a threat. It's hard to be attentive to both at the same time and capture calmness when they are feeding off each other.  I don't want the puppy to develop any leash aggression or frustration and negative experiences there.  Is there an initial step before they can be in the same room together that needs to be worked on? What can I do to diffuse this situation so that they can eventually be interacting safely without being restrained?  How do you teach a large breed puppy he can not "play" and bounce around a toy size adult dog? They don't have to like each other just be tolerable.  They are both well crate trained.  So far the puppy has been outside during the day while the little dog is inside, when no one is home, when the puppy is in the house, the little dog is in the crate, when they are outside together the puppy is on leash.  They sleep in crates side by side inside. They have different eating areas and puppy is fed outside, little dog inside. When their owners were allowing them to be together with the puppy off leash he was all over her and she was defensive and couldn't deter him off, he'd just get more excited. I wouldn't trust him off leash with her. I thought it best to separate them and prevent them from having further negative interactions, plus it's unsafe for the Chihuahua. So now what? Should I be feeding them together?  The puppy has not yet learned Not to hog all the food and stick his face in the other dogs bowl. They can walk next to each other and be in the same room ok but if they get too close the puppy gets excited and the chiauhua gets reactive. She also competes for attention which seems to be when she acts up I think she is trying to get closer to me and he is in the way.

Answer
Crystal, separate these dogs.  The chi obviously is fearful of the puppy and is acting out in order to avoid being hurt.  This just isn't a good match and they shouldn't be rehomed together.  At this age, the puppy should be learning social skills from a stable adult dog, not one who is fearful and antagonistic.  You have an almost impossible task and it's not fair to either dog.

I'm sorry that I can't be of more help via the internet.  I would recommend an in-person evaluation from a professional trainer if there is a reason these 2 dogs have to stay together.  Here's where to find help in your area:

http://www.karenpryoracademy.com/find-a-trainer
http://positively.com/dog-training/trainersearch/
http://www.ccpdt.org/
http://www.apdt.com/petowners/ts/default.aspx
http://iaabc.org/consultants