When you first click on the conflict report, you are given a set of options. First choose which type of conflicts you want to display; major conflicts are usually the only important ones. Next choose which files you want to scan. The include esps option will include all esps which are not parented to an omod, and the all omods option will check all omods. The ignore options will ignore any esps or omods which are not currently active.
The 'include esps which do not belong to omods' checkbox will add esps whose parent is listed as 'unknown'. esms will not be included.
If you want to check for conflicts between specific esps, or want to check esps outside of the data directory, use the 'add extra files' button.
When you are done, click run to generate the report. You can close the settings form at any time using the x to cancel the report.
Conflicts on the conflict report are colour coded. Green conflicts are very minor, and can almost certainly be ignored. Orange conflicts are minor and can probably be ignored. Red conflicts are major and will probably effect your game in some way.
Remember that this conflict detector has limitations!
It cannot tell how bad a conflict is, only how likely it is to have an effect on your game. A red conflict is more likely to do something utterly unnoticable that it is to completely break a plugin.
It cannot detect all conflicts. If one mod contains a script which increases a stat, and another contains a script which decreases it, then you are almost certainly going to end up with buggered stats, even though the script names themselves don't conflict.