I don't have much experience with truly aggressive dogs, but from what you've said, I can see a dog developing a problem -- lots of stress, + seeing a packmate attacked.
Other people might have better suggestions, but for my yorkie, I do the standard distract and reward. Do you have a friend with a calm dog? I would work in a controlled situation where you know that no dogs are going to run to you. A park would be okay as long as you know off-leash dogs won't approach. Bring along some treats, get him as near to another dog as you can WITHOUT him flipping out. Have him sit, praise him, treat him. Get him slightly closer. Repeat. If he lunges, remove him, give him a short time out and try again.
Again, if you have a friend with a well behaved dog, you can practice walking him side by side. It's all about de-sensitization, and associating strange dogs with yummy food.
This is said with the caveat that my dog is all bark and no bite. It's kind of funny actually. Last time he was in the park, he took on two boxers who were each at LEAST twenty times bigger than him. He was barking his scariest bark, but they kept walking towards him and he kept backing up (they were leashed, he wasn't in any danger). Then when they walked away, he barked them off. He's much braver when he sees the dog's back! My poor little guy's got no street cred at all. He's so tiny, I'm not sure if you'd notice a bite - it would probably be like a mosquito. Not that I'm planning to find out.
