Whew!! What a tough one!! I believe that honesty is the best policy. You need to just be upfront with her. Bad breath can be a sign of a serious health problem, dental problems or just poor hygeine. As embarressed as I would be if someone told me I had bad breath I would be MORE embarressed to find out later that EVERYONE noticed it but me. I would be kind but honest.
Reminds me of something someone said to me once....... if someone offers you a breath mint NEVER refuse, they might be trying to tell you something!!!
GinnyG on Ravelry, I'd LOVE to be in your "friends"