The comments all suggested that this pattern was hard to figure out, and they were right. Not even LilBean’s version was entirely correct. So after restarting the darn thing seven times, I decided to write out an expanded, extremely detailed, everything-spelled-out-for-you chart to help everyone else. It's really quite a wonderful (and fairly easy) project with the misfortune of having terrible instructions, so I hope you'll give it a go with my new instructions.
- Row 9 is the wrong side (WS) of the work, so you should be purling most of it. On the very last stitch of row 9, purl together the last st with the first st of the next row to start working in the round. Then flip the dress to the right side (RS) of the work, and begin knitting for row 10. From now on, you will be knitting in the round with the RS of the work always facing you.
- For the button hole, I just crocheted a short chain stitch and sewed it to one side of the back split. The dress folds funny if you create a button hole in the pattern.
Best of luck! Oh and if you're curious, Sara is indeed making a Princess Peach quilt to match the existing Mario nursery. Will post pictures once she's done. :)