Thank you for all your input! I do wish my problem was just that I had forgotten to remove the backing, but no such luck.
I did heat set it before I did the water soak, even though the instructions said to soak before the heat set, something which I found odd.
I tried a couple of test lines of machine quilting on the edge of it today, and I was right to worry. The machine needle leaves huge visible holes, which catch the eye more than does the thread. I'd be better off stab stitching the piece by hand. *sigh*
Oh well, this was basically an experiment, and as experiments are wont to do, this one failed, except for the colors in the printout being so fine. One tries things and then tries more things - that's part of the fun - right?
I have ordered some of that Miracle printable fabric from C. Jenkins, along with the optimized freezer paper sheets. Checking around at what people have to say about the Miracle fabric, it seems that it has a softer hand. We shall see. If the better freezer paper works, then my problem is solved anyway, I'll just use my own "real" fabric. I've always had trouble with grocery store freezer paper going through my printer - I expect it's just not fused well enough. Maybe because the freezer paper is Very Old? Time to reinvest perhaps.
I'll let you know what happens next.