In step 7, the part to the right of the seam allowance with buttonhole markings, is the buttonhole lip rectangle itself. The lips have been opened back out and now are being sewn together ALONG THE PRESSED LINE OF THE CENTER OF THE LIPS. After this step the lip seam allowance (where you see the raw material edge) can be folded back again, folding along the creased (and now partially seamed) line of the center of the lips -- right where they were folded before. It took me awhile to figure this out, but it makes sense, now that I realize that the piece of material with raw edges on the right is actually the buttonhole lips, pulled back on the wrong side.