Wondering if we're being paranoid and overprotective...

Half of me thinks "better safe than sorry",

I think you should listen to that half. Working on getting them to get along a little better wouldn't be such a bad idea, especially if you keep using the muzzle, but if it were me personally I would work more towards the "can see the other dog and not freak out" goal than the "let them play together happily" goal. Think how terrible you would feel if something happened to either of them, or perhaps worse, if something happened to you or your sister trying to separate them in case of a fight. The other thing that would worry me - what if one day Jaz finally decides enough is enough and lets loose on Cherokee? Even the sweetest dogs/people in the world have their breaking points, and I would certainly not want to see the results of that fight.

I don't know that it's "too late" to work on them getting along together, but I think you need to have a very low definition of what "getting along" means.

Cherokee was fine with Jaz being calm

I think that's what you want to work back towards. Still, for me personally I would never ever leave them alone together, and might keep Cherokee muzzled even then.

When Jaz is playing in the back yard, if Cherokee hears him or sees him through the window, she goes nuts, barking viciously, and sometimes I'm afraid she's gonna go through the window. I go into the room and she calms down, but next time the same thing happens. I'm scared to put them together now because she's so accustomed to acting aggressively toward him, even if it is through walls, windows and doors.

I would start desensitizing her to this. Get her used to the idea of seeing him through some sort of barrier without spazzing. Maybe she's feeling like he's invading on her territory, maybe she just thinks he looks like lunch, I don't know. But working on her being calm when seeing him outside would be a great first step. Then after that's accomplished, I might work on her being calm while seeing him from across the house/room (both of them leashed, Cherokee muzzled).

I think Jaz is much happier hanging out with your sister in her room than he would be getting in fights with Cherokee.

All that said, I don't really have experience at all with aggressive dogs, so this is just my "gut instinct" talking. Maybe I'm just talking out my butt and the two dogs would work out a hierarchy and become best of friends, but it sounds to me like a potentially dangerous situation and I think you're right to be careful.

i'll venture to start this, but it would be a long haul.
 
The problem is -- the way you began all of this has set this up for Cherokee to continue to think it's fine for her to be aggressive.  It's what she does, and even her hissy fits at the window confirm that for her. 
 
Desensitization in an aggressive dog has to be done absolutely consistently and very slowly ... but it's way deeper than just putting dog A and dog B together with a muzzle on one of them.
 
See so much of training/desensitzing an aggressive dog has to do with not just how the dog relates to the other dog, but how YOU relate to Cherokee.  For example -- if while Cherokee is upset -- in fact if when she makes the first low growl in her throat, if you pet her and say 'It's ok Cherokee, that's a good girl' -- you just reinforced her negative behavior.  You have to break down the behavior to exactly what is going on at this very *second* and deal with that.  You ahve to not 'reward' any negativity on her part. 
 
I learned much from a trainer up at the University of FL -- she has shown videos in the symposium, and you can see just from the first 'meeting' between the dog and trainer where some of the problems start.  The dog is sitting next to it's owner, and the trainer sits across.  The dog may emit a low growl and almost every time, you see the owner put their hand on the dog's neck to say 'It's ok Baby!' -- that 'petting' ***which WE do because we want to defuse the situation and 'reassure' the dog*** actually has 180 degrees opposite effect and it makes the dog think "Oh gee she LIKES that I growled and she petted me for it!"
 
If you want to try to do this, you have to first determine if this is true 'aggression' or if Cherokee is truly fear-aggressive.  You handle those totally differently. 
 
That's where a lot of the books become confusing -- because you have to figure out what's going on first.  At this point -- yes, I would say you need to start training her and desensitizing her (we've talked about that before -- it just flatly makes it SO hard for you to take her to the vet even). 
 
In your particular case, probably the first place I would tell you to look is to find out what is the nearest dog-training club.  If you even just get to know some of the trainers, and WATCH them.  Join the club and learn more about training -- and then you can take that home and help Cherokee with it.  You might be able to take JAZ to the training (since he's not aggressive) and then come home and work with Cherokee separately.  But honestly -- until you learn the rudiments of "training" generally, trying to figure out how to jump in and desensitize a dog with Cherokee's problems isn't a 2 second process.
 
I would also not allow Cherokee to have a hissy fit while Jaz is out.  She WILL go thru that window and that would be disaster.  I would start to crate train her (and frankly if you don't do NILIF with her that's something that will help the beginnings of training as well).  But if she has a crate and is crated then it will give Jaz more freedom as well.  Their time 'out' should be more equal -- it is only feeding Cherokee's feeling that Jaz is an interloper who needs to be 'stopped'. 
 
Both dogs need crates and need to be comfortable in them.  my guess is that Cherokee pretty well 'runs' the house -- and it has to be humans in charge in order to make the first steps with this.  Does that make sense?? 

Has she ever seen this dog in another setting? Have they ever been walked together...one person per dog? What's her reaction then?

Cita: But working on her being calm when seeing him outside would be a great first step.

 
She has no problem seeing him when he's calm, but he's a playful guy (he's 7 years old, you'd think he'd be calming down a bit. NOPE!), and when he's out of his room, he doesn't sit still for long. Cherokee can even sit in the same room with him without a peep or tug on her leash, but as soon as he starts bouncing, she can't take it. Last time they scuffled, it was because someone was walking in the front door and he got there first. She only goes nuts at the window when he's running around like a madman.
 

Callie: but it's way deeper than just putting dog A and dog B together with a muzzle on one of them.

 
Oh believe me, I know this. When Sarah and Jaz first moved in, I thought Cherokee would be fine. I really did. She has lived with dogs before, she had met Jaz before (although it was a few years ago). I thought at most we'd have a few days of posturing. And maybe that's all we would have. But we got spooked by it and gave up.
 
I just remembered that Cherokee had met Jaz before. I was thinking she hadn't. It was around 3 years ago. I took Cherokee to Sarah's house with me several times. Jaz wasn't neutered yet, and he kept trying to hump Cherokee, which she did not like, but when he wasn't humping her, they played and were fine. Interesting. Anyway...
 

if while Cherokee is upset -- in fact if when she makes the first low growl in her throat, if you pet her and say 'It's ok Cherokee, that's a good girl' -- you just reinforced her negative behavior.

 
I really appreciate your help Callie, I do, but I think you must not realize that I've had this dog for almost 8 years and have done a lot of reading about aggression. I don't tell her it's okay or she's a good girl when she growls at something.
 
She's definitely fear-aggressive. She's my little sissy dog. Jaz and Cherokee both have histories of abuse, and both are such sissies. Only they deal with their fears very differently. Cherokee growls, snarls, and lunges, and Jaz cowers, pees, and hides. It's a fun house. Really. Come visit. []
 
I do NILIF with Cherokee. She has no issue lying down before she gets fed, or sitting calmly while I attach her leash. Also, I don't really see why they need crates. I think our bedrooms just act as very big crates. Any reason why that doesn't work? I don't allow Cherokee to go wild at the window. I get Jaz into another part of the yard to play and/or go into the room with Cherokee. She doesn't make a peep if I'm in the room with her, which makes me wonder if she's afraid Jaz is going to do something to me, or if she just feels safer if I'm there with her.
 
I really don't understand her fear of Jaz. He's NEVER let out so much as the tiniest little growl at her. He so obviously tries to submit to her, tries to calm her down, but it doesn't work. I'd think it was just his energy level, except she got along with my uncle's psycho hyper boxer before we moved from Maryland. His size doesn't make sense either, because when we lived with my aunt, she was perfectly fine with her 80 pound husky. The only thing I can really think is the fact that he's male. The dogs she's gotten along with in the past have ALL been female.
 
I'm going to try walking them together (someone else walking Jaz of course..not me with both). I keep meaning to try that. My thinking is she won't give a crap about him out on a walk. Maybe we should go back to basics and try putting them together in a totally neutral place. But if she's fine then, which I think is a possibility, does that mean anything? And then there's the question of muzzling or not... Sigh.
 
I guess it's easier to keep them apart, I was just wondering if that was ridiculous since there's never been an actual fight. But if the general consensus is we should just keep them separated, maybe I just won't worry about it. It just sometimes seems a little overcautious to me, since Cherokee obviously is very good about bite inhibition.
 
I do feel bad for Jaz being in the room so much, but honestly, even when Sarah's bedroom door is open, after a few minutes of playing, he goes back in with her. Both dogs are retty velcro-ish, and since Sarah is usually in her room, and I'm usually not in mine, it just seems natural that mostly Jaz is in his room, and Cherokee's out with me. Plus Cherokee's a lot more trustworthy in the house by herself than Jaz is. When Jaz gets bored, he chews. If there's nothing suitable to chew, he finds something. Kid toys, shoes, plastic, metal, he doesn't care. He used to have a crate, and one time he didn't have anything inside to chew, so he chewed the door of the crate, and ended up with several broken teeth, blood everywhere. Oh yeah, he's a special dog. [8D]
 
Thanks everyone.