^ I totally agree. With some dewormer, some training and some plump-ness, I'm sure he'd be a great little horse... But as for the trade, I wouldn't put my horse into a sittuation like that to be sold.
I guess what it really falls into is whether or not YOU feel comfortable giving this lady your baby (after seeing how her horses are kept and look) to sell. I, personally, would laugh in her face. Do you want your boy to look like that? do you MIND if your boy ends up looking skinny and wormy?
Do I think you're doing the wrong thing? Yes. I, in my honest oppinion, think you should sell your baby to a home you approve, and with that money buy something you can ride. Don't just settle for the first decent oppurtunity you find. I promise you that if you keep looking, you'll find something even better. It's just going to take a little bit of time. In the mean time get your little guy some awesome ground training and enjoy the rest of the time you have with him.
Good luck. I hope the decision you choose to make is what is best for you.
=)