1. immediately change the mode of conversation... emails are first step towards such failures. [imagine your doctor treating you through emails]
2. was there a requirement document / product backlog? if yes.. then revisit it. if no, then perhaps, time to go back to the war-room and create one. see what could be accomplished and what all has changed
3. since your motive behind accepting the proposal was to build reputation (knowing the risks) see whats suits you the best... saving the reputation by slogging or starting afresh. it is not a sin to lose if you can draw positives out of it.
4. negotiate with the client.. build a mutual expectation level... start with small piece of working AND acceptable output and keep on enhancing it.
5. note down the learning so far... look out for new projects!!