Converting a Project from D6 to D7 using Drush in localhost?
Drush Site Upgrade 7.x-2.x is for upgrading FROM Drupal 6 sites TO Drupal 7 sites.  I know that the version numbering is a bit confusing, but it is based on the fact that the Current version of Drush is 7.x-5.x.  This version of Drush supports both Drupal 6 and Drupal 7, but is versioned 7.x to match the most recent stable version of Drupal supported.  Similarly, Drush Site Upgrade is versioned 7.x to match the version of Drush that it works with.  I added a sentence to the Drush Site Upgrade homepage to clarify that it is for D6 -> D7 upgrades; the README.txt already explains this.

As for a step-by-step guide to using Drush Site Upgrade, please understand that the Drush Site Upgrade command itself is a step-by-step guide to upgrading your Drupal site.  This command will print out an explanation of what it is about to do at every step, and then prompt you before taking action.  Run with the --always-prompt flag when you're first getting started to insure that absolutely everything will be prompted.  If there is a step that is not applicable, or does not work right for your environment, you can tell Drush sup to skip the step, you can do the operation(s) you need to by hand, and Drush sup can continue the upgrade process on the next step.  If something goes horribly wrong, you can always start over from the beginning and try again.

As you inferred, Drush Site Upgrade will not actually upgrade the code of your custom modules to D7.  For help with that, please see http://upgrade.boombatower.com/.