row5 : k1, YO, insert right needle from front between next 7th and 8th sts on left needle and draw up along lp; sl lp onto left needle and knit it tog with first st on left needle; then work wrapped sts as follows: k1, sl1 k2tog, psso, k2.
Begin with a yo and then reach over to right after the 7th stitch on the left hand needle and between that st and the 8th stitch insert the RH needle tip, then yarn around and pull up a stitch loop, stretch that stitch loop out until you can put it up onto the LH needle. (Be careful that you don't lose the yo you did to begin with.) Now knit the stitch loop you just added to the LH needle together with the next regular st loop.
Now you have 6 more(the first 2 you knit together make the first 1) stitches that are "wrapped" on both front and back by 2 strands of yarn kind of garlanded across on each side of the fabric. Those are the stitches it is indicating when it says "then work wrapped sts as follows." They are the next in line to be worked on your LH needle. Just do what it says to them K1, then sl1 knitwise, then k2tog then pass the slipped stitch over the resulting loop from the k2tog, then knit the last 2 of them.
You end up with your yarn over and then 5 stitches wrapped on front and back with the two garlands. I say garlands. If you have a picture use it to determine the type of tension you want on the front and back strands. Are they pulled tight and make a pucker, or are they loose and swag-like? Try to imitate the look in the picture.