The paths it searches are in the README file.
Not sure what to say about titles not being found on USB. I have confirmed cases of it working fine, even on multiple USB devices connected at the same time (USB0: and USB1:).
As far as launching titles...it will launch them from where ever they are located, so, if they are on USB, they will be launched from USB. This also is confirmed working.
Running the script is also described in the README file. Execute the perl script, and redirect its output to a file. Yes, it connects to the MS marketplace website and scrapes it...it can take a few minutes to complete. Run it on Thursdays after XBLA titles are released on Wednesday. ;-)