Summarize:

One of those sheets of paper is going to be the cover and one is going to be the back of the booklet. Both sheets will make up the pages inside the booklet. Horizontally means hamburger style. Make sure that you're cutting them in the top and the bottom. The cut should be just over one inch (about three centimeters). Don't crease this sheet, just pinch it closed, since you only need it folded while you create the hole along the crease. If you crease it, the pages in the booklet will be creased. You're folding it hotdog style. You're making a hole along the crease where you'll slip the other sheet (the one with the notches) through. The  hole should go from about one inch on one side of the crease to about one inch on the opposite side (three centimeters). The most important thing is to make sure that the notches fit into the hole since they'll keep the pages in place. The more exactly they fit the neater your booklet is going to look. It can be helpful to gently curl the sheet with the notches so that it doesn't get bent or torn while you're slipping it into the hole. You'll want to curl it vertically so that the corners come together. The above booklet has eight pages, counting the cover and the back. You can add as many pages as you need (within reason; you don't want to put too much stress on the center hole as that can tear it).  Fold a piece of paper hamburger style. Cut notches little more than one inch (three centimeters) on the crease on both sides. Pick up your original booklet and find the page that exposes the hole (where this falls depends on how many pages you have). Slide your new page into the the hole, curling it a little so that it slides in easily. Do this until you have as many pages as you need.
Fold two 8 1/2 x 11" pieces of paper in half horizontally. Cut notches in the crease on one sheet. Fold other sheet in half vertically. Cut along crease from about three centimeters on both sides. Slide first sheet into the hole. Add more pages as you need to.