Basically you're going to make the ki, p1 rib that you see in the left drawing around the leg opening. The pattern has you do this before the front seams are stitched together so that you can knit it back and forth in the flat (but you could also join the front two seams and pick up in the round for the ribbing around the legs). You're going to pick up along the line of bold double dots (..) that mark the increases or decreases, then along the crotch and again up the line of double dots on the back of the cover.
There's a video under the Free Videos tab at the top of the page, Tips, Picking up stitches if you want to see an easy way to do this. Usually you would pick up along the edge or one row in from the edge.