That totally sucks.

The before shot looks AWESOME (kudos on the work!), and that's a real bummer to have that happen.

If its any consolation, I can confirm for you that printing the decals on a laser printer works better than on an inkjet. When I restored all the lettering on my Space Odyssey I printed my decals on a laserjet using decal paper I purchased from www.robinseggcetera.com. Was the cheapest place for me to order and have it shipped to Canada from, for the handful of pages that I needed, and they turned out good when cleared w/Varathane. Already had a layer of Varathane underneath, put the decals on, did another light coat, let it sit a few days, then did another light coat before continuing on with other touch-ups. Two heavier/wet coats came right at the end on top of everything, but that was right at the end.

I can also relate to that moment of "Aw, CRAP!"... after doing a whole pile of paint-work to restore my Doozie, I did a light sand and reached over to grab the bottle of naptha to wipe it down. Grabbed the wrong bottle, and in the first wipe across the playfield pulled up ALL of the paint work I'd just spent weeks on. One wipe, all gone. Took me a month or two to get up the gumption to dive back into it, but now that I have its looking better than it did the first time.

I know its discouraging, but push on, the results will be worth it.

I'd go that route. Sand it back until its smooth, and either put a new decal right on top (so you wouldn't even know the first one was there), or paint the section, clear that, then put the decal on top of that and clear it again. Wouldn't need heavy/wet coats of clear either; I'm thinking more like a mist coat to just provide the same surface below and above the decal.