A site requested a link exchange and their homepage shows PR 5 in Google toolbar, however the 1st level page that they requested a link to shows PR 0 (white bar). Will it hurt our PR to link to this page or should we link only to their home page?

I wouldn't depend on the toolbar PR.

The site can be penalized and show a toolbar PR5. With the interior pages, one other scenario is that the pages could be new and thus haven't established PR yet.

Trading links isn't the best route to go. Doing so based on the toolbar PR is not a reliable tactic, imo.

Logan is right. Don't depend on what you see in the Google toolbar. The PR that you and I see there is only updated once a quarter (once every three months) so it's totally unreliable.