Yeah it takes screenshots periodically and all the storage and analysis is done on your local device, which is why it requires the newer CPUs with NPUs from Intel, AMD, and Qualcomm. There's a setting to turn the whole feature off, and you can also choose to turn it off for only certain applications, etc. Microsoft seems to be making an effort to encourage chip manufacturers to make better NPUs so that their AI features can run as locally as possible. That's likely why their new surface devices will be using the snapdragon x elite processors because they're the only ones that have NPUs with enough TOPS to run all the AI features Microsoft wants on device, instead of having to send the data for processing to a Microsoft server. I think beyond trying to quell privacy concerns, it would be a huge cost for Microsoft if they had to have enough compute available to run all these AI tasks for users for free. I'm sure there's still some way they are logging pieces of info here and there, but they'll have to include some way to make sure the OS is secure enough for business operations that are handling secure information.

People are acting as if auto saving, web history, reopen last used windows, etc aren't already features on all modern apps and OSes. If the claim about everything staying on device is true then this is no different.