Here are some additional instructions and photos I hope will clear it up...
From Step 2 in the book: Rib stitches have already been divided in order to knit around.
Step 3: Now you are starting the 2-color slip stitch pattern. This section is knit around. When you knit around, a pocket is formed in the center. That’s where you will hide the ‘knot and tail’ from tying the contrasting color onto one of the main color strands.
The next photo shows the contrasting color yarn (light grey) tied onto one strand of the main color. This main color strand will be carried up through the pocket. The remaining main color strand will be used to work your slip stitch pattern along with the contrasting yarn.
The following photos show the unused main color yarn being carried up through the center, hidden in the pocket until you need it again. The yarns being used to knit the slip stitch pattern are seen off to the right.
I hope this helps, but if more is needed, please don’t hesitate to ask.