I prefer the darker version, and the rash doesn't bother me (but then again, I don't have the rash.

If you wanted to keep the baby light, you print it lighter and go up half a grade to keep the blacks where they are.

I'm not a big fan of diffusion under the enlarging lens, but if the rash really bothers you (not that I'm implying that you have the rash), you could try a slight amount of diffusion to smooth that out.

About that top corner, you could also crop it out. I think it would look good with a tighter crop, maybe as a square, as long as the image can tolerate it at whatever enlargement factor you have planned.