I've been asked a few questions about how to do a yarn over and how to read the chart. So here are my tips/explanations:
If you're not sure how to do yarn over which is the only lace stitch in this pattern then http://www.knittinghelp.com/ used to do a very good video tutorial Look under techniques on that website. She's brilliant for a lot of stuff. I used to use this site a lot and it's where I learnt to do yarn over. Basicall doing a yarn over works like this: Between two stitches, move the yarn to the front between the two needles, then over the right needle to the back again and carry on knitting. As you've got to purl the next stitch, if you're knitting the English way or continental purl with yarn at the front, you would then need to move the yarn to the front again to purl. Basically all you're doing is creating a loop over the needle to create an extra stitch. Below that stitch there will be a hole which is what creates the holes in lace knitting. On the row when you need to drop the stitch. Just drop the stitch off the needle and let it unravel down to where you did the yarn over. It won't unravel any further. Just make sure you drop the right stitch.
Normally when you create an extra stitch with a yarn over you'll have a corresponding decrease somewhere else on the row to keep you stitch count correct. Because on this pattern the yarn over stitch is an extra stitch that'll be dropped later on, you won't be doing any decreases to make up for the extra stitch you made. On the chart each square is one stitch, so to allow room to put in the yarn overs I needed to put in extra squares which I shaded grey to show that there isn't actually a stitch there on those rows. So basically as you're knitting along and come to a grey square, just pretend it's not there, skip over the grey square and continue the row. With a lot of things once you start knitting and you can see the pattern unfold in front of you it all makes sense. Try not to get too technical about it and try to understand how it works before hand. Just start knitting and follow the chart square by square and it should come out right and as you're knitting and compare your knitting to the chart it all start making sense.
All charts should be read in the direction you're knitting when you look at your piece of knitting from the RS so in this case as you're knitting in the round, all rows are read right to left. In flat knitting, you read the chart right to left on RS rows and left to right on WS rows.
Also remember I put an errata on the blog to say that the rib cuff should start with p2, k2 (not k2, p2) this way it'll line up perfectly with the charted pattern. It's just one continuous rib flowing from the cuff into the leg.