dog...or cat?

We have an issue. Our dog is terrified - of everything. People, noises, shadows, imaginary things - everything freaks her out. She is in classes now to teach her to sit, come, roll over, all those things they learn in class. But our dog isn't the average dog. We can't reward her because she's sometimes too scared to take treats. She isn't so much a dog you can play with, but a house cat that will try anything to get out of your way.

Should we take her back? If we take her back we would have to return her to the rescue place, which seems more like doggy hell. It's quite sad at Towne and Country. I would recommend never rescuing a dog from there - because they lie and the suck at life. I would feel bad for taking her back, but keeping her is difficult. Watching your every move so she doesn't freak out and run into a wall. Even so much as opening a jar will make her run.

What should we do? Are we failures for wanting to give up? I feel bad, but our dog is special needs and we need to fix it! I want a dog I can play with and will love me! is that too much to ask?