HI Teresa,
I'm so sorry to learn of your baby parakeet's problem. I can tell you have tried really hard to solve this problem and truly care.
What is happening is a condition called "splayed leg" which is an orthopedic deformity. It can be caused by several different causes such as nutrition, genetics, nesting conditions (possibly the cause in your case), siblings placing too much pressure on a small baby, and other things.
If caught early enough, splayed leg can be fixed. I fear however that it is possible you have waited too long. The optimal time to catch the problem is 14 days or less. BUT, I would still like you to give it the best shot. The best idea is to have a qualified avian vet look at the baby and follow his or her advice. However, to give you an idea of what may be tried by the vet, I'm providing some info links to show you methods used.
Good info but pictures won't load for me: http://www.cagenbird.com/splayed_leg.htm
Splay Leg Repair: http://www.parrotparrot.com/splay/
Now, if the baby does not respond positively to correction, it is unfortunate but true that it will be handicapped for life. However, many parakeets and other parrots who are handicapped can live happy lives is loved, properly cared for and with proper cage accomodations made for their inability to perch properly and use their feet properly. So, just because it is possible the little guy will never have normal feet, don't give up on him. Handicapped birds can be extremely loving companions if you are willing to give it a try and dedicate time to him.
Because of this condition, please review your parakeet diet before allowing any more breeding, in case nutrition is at the core. The diet should be as close to 35% seed/pellets as possible with the rest being fruits, veggies, and bird-healthy people foods. A cuttle bone must be always available to the birds (the new baby also as it grows up) and the birds need natural sunlight or full-spectrum supplemental lighting to help create Vitamin D to absorb calcium properly. This is crucial and only parents who have eaten a good diet for a period of months should be allowed to reproduce because of potential problems such as egg binding or nutritionally based defects. http://www.freearticlesarchive.com/article/Why_The_Wrong_Parrot_Diet_Can_Kill_Your_Bird/53588/0/
will tell you more about foods to select and which to avoid as well as ones which are toxic.
I truly hope you can help this guy's little legs become strong and in proper placement. But if it can't be done, I do hope he (or she) will be provided a loving, caring home for life.
Just in case, here are some links to info on caring for and housing a handicapped bird:
http://www.geocities.com/brdsong123/Special_Abled_Birds.html
http://www.avianweb.com/Kula.htm
http://www.parrotchronicles.com/marchapril2004/disabled.htm
I wish you and your parakeet baby the best and will be pulling for him to be okay.
Breeder
over 25 years breeding, taming, training parrots.