When they say two top stitches, I think they mean the stitches that are on the top of the foot, maybe? Not all the way around, for sure, though, or it would get really small, really fast.
The next part should have been put on one line and it would not have been confusing. Knit one row, purl one row until knitting covers little toe.
The only time you knit one row, purl one row in circular knitting is when you want garter stitch, which these slippers are.