I’m not a lawyer, but then I don’t think anyone else who has responded to your original post is a lawyer either; at least no one has identified themselves as such. That said, here’s my two cents.
- You own the copyright.
- You do not own the image, that is, you do not own the copy (or copies) of the image that you gave to your client.
Every contract implicitly assumes that the parties to it will end up in court, where you would be the injured party, i.e., the plaintiff, and the burden of proof (that you have been injured) would be yours. What actions did your client take and which of these injured you?
- She copied the file from the DVD to her computer. Did this action violate your copyright? No. It’s reasonable use. She had to do it in order to edit the file. Furthermore, she has the right to maintain an archival copy. If you claim "the DVD is the archival copy" then she has the right to make a working copy. If you claim that your copy is the archival copy then you must make arrangements for that copy to be maintained in the event that you go out of business or die. If you cannot prove that you are a reliable archivist then your copy cannot be the archive copy.
- She altered the image. She edited it. Does this injure you? No. She has the right to alter the image, or rather, her copy of the image. This point goes right to the heart of the copyright vs. ownership issue. You own the copyright. She owns one or more copies. She can do whatever she wants with that copy or copies.
- She put it on facebook. Is this an injury? Maybe. Is posting on facebook “personal use?” This is the point on which the lawyers will gird their loins and do battle. I think the term "personal use" is terribly vague.
As for the “potentially negative effect on your business” I don’t think you have much of a case. This is based on the perception that the defendant’s alterations degraded your work, a totally subjective judgment. All the defendant’s lawyer has to do is claim that the alterations improved the picture and that’s the end of it. The courts have unequivocally stated that they are not critics. For them to allow artistic criticism in court would be to invite a plethora of frivolous cases.
Your letter to the client should have been written by a lawyer. Your letter makes assertions that are inaccurate from a legal point of view and could be viewed as an attempt to intimidate your client. That cannot help your case.
Another point is that a jury is almost certain to be sympathetic to the defendant. That’s the way juries are in civil cases. They tend to favor the defendant over the plaintiff, the little guy over the big guy, the customer over the businessman. Maybe it's not right but that's reality.
I must end by re-stating that I am not a lawyer. Every opinion I have stated here could be wrong so you really should ask a lawyer.