Knit in stitch below SNH pretty please :)

[HeatherFeather]

I looked at Amy's video, and it cuts out exactly the milisecond before my question!!!!

So, I get where I am supposed to put my right needle, in the stitch below...
BUT....what do I do with the stitch above? If I knit that, I'll have an increase, but if I drop it...I'll have a dropped stitch?

i have some booties I'd like to make...that has this in it. thanks!!!