UPDATE!

Thanks to an explaination from shetha and some great photos and tips from Socks 101 I got this heel thing figured out. Boy this is fun! I just wish I hadn't run out of yarn! Now I have to wait until I get home to see how it finishes.

Funniest thing happened. I saw the end of the yarn and realized I would have to stop knitting soon. A moment later I realized I was knitting faster and faster, as though I could "outrun" the end of the yarn and not let it catch up with me! What a goofball!