I heavily starch flannel before cutting. Heavy starch stabilizes the fabric so it doesn't stretch or distort with handling.
Chances are good that you can get your squares back into "true" with spray starch and an iron. Sharon Schamber has some great videos on how to do this on Youtube. Here are links to how she does this (not necessarily in order):
http://www.youtube.com/watch?v=v-3RIWhBvcA
http://www.youtube.com/watch?v=i6aplw_tVZc
http://www.youtube.com/watch?v=lIjZqABo2NY
http://www.youtube.com/watch?v=sQkF02vpVuw