Here's a swatch I knitted to test the same pattern in two ways: mixing purls & knits to the left, and knits only to the right. (It is easy to see where I didn't pull the yarn hard enough!)
Actually, all rows are 1 yellow, 1 white! It is the yarn you don't knit with that you can use to form a pattern. (If you always keep both strands on the wrong side - knitting in the round is highly recommended! - you will simply get stripes.) When you move the strand you don't knit to the right side it will cover the other colour.
Does this make any sense at all? Do check out Asbjörn's links (see my previous post)! Anyway, it looks and feels different from fair isle knitting; in a way it reminds me of woven fabric.