I have that book!!! It's great ^.^
Look above needle 2's instructions that you are having trouble with. You placed a marker after your PU stitches then is says work half of instep stitches in pattern.
Then there's needle 2 saying work half (what you posted). In other words, at this point you shouldn't have all the instep stitches on needle 2.
What you're doing is transfering some of the stitches to the other needle so that at the end each needle holds half the foot and half the instep stitches. With needle 1, PU first side of stitches and knit half the instep stitches in pattern. With needle 2 work the other half of the instep stitches in pattern, then you do the PU. Then it says to knit half the heel-flap stitches from needle 1 to needle 2. Now you should have half and half on the 2 needles.
As for the gusset decrease, do round 1 once after you've finished the PU stitches round. That's the only time you do it. Now go to rounds 2 and 3 and you'll notice you only repeat them from then on. It says repeat rows 2 and 3 until (#) remains.
Hope this helps