CO is “cast on” – so “first CO stitch” is the first stitch you cast on.
When you finish casting on the number of stitches you need, you have a line of stitches; on one end is the first stitch you cast on, and on the other end is the last stitch you cast on, and the working yarn is coming out of the last stitch.
For flat knitting, you turn it around so that the needle’s in your left hand with the working yarn (and last stitch) at the point of the needle, and you knit across the row from the last stitch to the first stitch. For knitting in the round, the first stitch you knit onto is the /first/ cast-on stitch, not the last cast-on stitch, and you knit the same direction around the stitches.
(You shouldn’t be losing a stitch – joining just means knitting the first stitch of the second row using the first cast-on stitch rather than the last cast-on stitch so they make a circle. You don’t need to combine stitches or knit them together.)
The Advanced Techniques section of KH (http://www.knittinghelp.com/knitting/advanced_techniques/) has some videos for how to do circular knitting – you may find that helpful. I know I find it really really useful to be able to see what’s hapenning, rather than just trying to figure something out from another person’s text description.