i am at work so can't try it for you but reading it over...is your rectangle 2 1/2" x 4 1/2"? then you add the 2 1/2" squares on the corners and sew on the diagnals...it will finish at 2 1/2" x 4 1/2" and should fit step 5 just fine...if you are an inch short...did you cut your rectangles 3 1/2" instead of 4 1/2"
that's the only thing i can see just looking at the pattern that may be a problem, the pattern sounds correct...
i will check back tomorrow when i'm home and if you still haven't got it to work, i'll try a practice one and see if i can help further.
it's always a bumber when a plan doesn't come together.