We have a very clever (and sometimes very naughty[

]) mini-schnauzer, Lilly. She's about seven months old and we've had her since she was about six weeks old (from the shelter as a foster). She's a lovely dog and sharp as a tack, which makes training much easier...except for one thing. Chasing cats.
Lilly has decided that cats are the most fun, most interesting, and (more importantly) the tastiest creatures on earth. She grew up with my cats, who have always been bigger than her until recently when she hit a whopping 11 lbs. She is never left unsupervised with the cats - she's actually never unsupervised at all. We have never allowed her to chase the cats or treat them as toys, but this rough behavior is coming out very strongly now. Given what schnauzers are bred for, I'm not surprised that she is chasing cats; I just need to figure out how to manage it. The problem is that she is getting ahold of them and trying to shake them like a chew toy. The house is divided up into 2 parts, where the cats can go anywhere and the dogs are confined to the downstairs when out of their crates. The cats (not declawed) are not fighting back, nor are they running away, even though they have cat-safe places to get to, so we often have to pry her off of them before they get hurt. [&:]
We are working on sit and down, which she is good at, as well as come and leave it. She is doing very well and will leave it/drop it on anything, including her favorite toys, except for the cats. I have tried everything high profile for a dog - liver treats, favorite toys, beef jerky, chicken - but nothing is worth leaving the cats for her. She punctured our big male cat's head this morning while I was making breakfast, so we are desperately trying to figure out what to do. We have had her tethered to us to prevent her from chasing, and when she is on a lead, she won't chase them, although she will definitely alert to them when they move around. The problem seems that she is smart enough to know that when she is off of her leash, there is nothing that keeps her from running at the cats. Squirting her with water does not faze her and our malinois will have a heart attack if we use loud noises to startle Lilly. Someone at work mentioned an e-collar, which would really be a last resort for us.
Any suggestions on what to do would be really appreciated.