Read the rules carefully. It says to USE the set aside cards.
While the rule is explicit that you use the set aside cards, nobody can argue that the wording isn't poor. There is no reason why they couldn't have stated, "Shuffle the Act One cards and then discard 7 cards out of play. Place the remaining 26 cards on top of the Act Two deck for a four player game."
That would be so much clearer. My game group had the same linguistic challenges with the rule book on our first play.