OMFG. If I saw a sweet old Border Collie in that shape, trust me, I would not even bother to talk to the owners >.< just, poof.

Sorry that you have to see this and not have anywhere to turn... can you contact the nearest SPCA? they're usually MUCH better about responding to calls of abuse. That is not at all acceptable, it sounds a lot like what I see on Animal Cops, and the owners have actually been sent to jail for allowing a dog to suffer like that. Why does the dog even need a chain, if he's in a kennel?

Here's what I would do, if I were you... (1) volunteer to bathe and clip him (although it sounds like a job that needs professional help), and give her pointers on how to care for her dogs. or, (2) act like you really love the dog and ask if you can adopt/or buy him for $20-50 ~ then get him to a no-kill rescue right away.