Throw out this row - yo, K1, yo - after casting on 3 sts you have to use them all , same for this one -K1, *yo, k2tog*, yo, don't end a row with a YO. It's perfectly fine to have a few rows before the mesh pattern. So begin with CO 3 and knit all sts. Then next row - k2, YO k1, and k1 p2, k1 on the next row. Then you can continue as written... I think.
The rows beginning here - Row: K1, *yo, k2tog*, k2tog, yo, k2tog - won't work you have 2 decs at the end and only 1 YO. Just keep going the same as before.
Now I have a suggestion. Please try one or both of the patterns I linked to in post 6 and I think you'll find the mesh stitch they produce is the same as what you're going for. Except for the lacy baktus being in garter, but you can purl the WS rows. These patterns have been made several times and will work; at the very least they will show you how to work the incs and stay in pattern to get what you want.
sue- knitting heretic