That would be the problem. I don't think he is diseased, though, just massively harassed. I didn't go to see him today as it was bucketing down rain when I left uni and I ride a scooter, so I was pretty wet.
Have you heard of the dwarf gourmi iridovirus (dwarf gourmi disease)? That would be my biggest worry. It often shows very little signs and can be transmitted to other fish. And I'm also just flat out paranoid about not quarantining fish after I had a fish lice disaster with my goldfish tank a few years ago. -shudders-
I have asked all the local fish shops if they have ever had a problem with iridovirus, and all but one have said no. They guy that did stopped selling DGs altogether, and all the other stock I've seen in the city have seemed healthy...it is a risk, though, since I know we get most of our fish from Asia.
I know nothing about the requirements of other fish, but I would think the main priority for this fish would be to get it out of that other tank and into something where it can heal - even if it isnt the right size. After its feeling better then I would worry about the right size tank or rehomed. Then again this would explain why I have 2 bettas in storage containers and one living in a stolen veggie krisper Soon they will get a 10G