you need the cd and a usb drive that the xbox can recognize.
i had a problem the first few times i tried to run the freestyle cd too, but it turned out that my 360 didnt recognize the one thumbdrive i was using. put in one that was formatted with fat32 and it worked fine.
burn freestyleusb iso cd (i used imgburn),
put the freestyle folder on the root of the thumb drive i put the whole folder on the thumb drive, but i also opened up the freestyle folder itself and put that content on the root of the usb drive too (mainly so freestyle.xex was on the root). not sure if it needed to be or not, but i had it there from when i was having trouble with my other usb drive
but once you have the freestyle folder on the root of your usb drive, put the usb in the xbox, put the iso cd you burned in the dvd drive, and play game. it should load right up to the freestyle dash now