It pulls from your offline folders from each application you link to timehop. It will show you photos that you took one year ago on that day. It uses the embedded date stamp from the photo to remind you of what you were doing on that day.
This only takes a few minutes to get up and running and more less is a walk down memory lane. The great thing about this is it is private to you. Only you can see what was happening one year ago on that day, unless you choose to share with whomever you choose.
Another cool feature is it will randomly give you a fact about something that occurred on that same day on a random year.