Machinists do have a bit that will cut a square hole. I've seen pictures of it, but I don't fully understand how it works. It is, as described above, a triangular cutting bit. It oscillates in such a way that its' straight sides travel to cut out a square hole. I was under the impression that the bit had to be positioned vertically so that the hole's walls are also vertical. It is probably geared so that its' movement is predescribed as a square.
I found a link to the watts drill http://toolmonger.com/2006/11/30/too...re-drill-bits/ and then another to this article "Drilling Square Holes" http://upper.us.edu/faculty/smith/reuleaux.htm.