Jim
I agree this is not an image i would have shown but since the client picked it I would not try to do much with it-the client liked it for a reason
I would not tell them "I wasn't happy with the way the original image turned out...", I feel the client choose this image for emotional reasons-not technical. Any comments about the technicals will most likely effect their emotional feelings to the image.
I agree with Jim Garvie, never do on-site proofing without pre-screening the images; nevertheless, the damage is done. Time to deliver the order "with a smile". I would not worry to much, I think anytime they show the image to anyone, it will come with a explaination of how they like the "dreamy" quality of the image