Wow, now I'm completely lost. I don't know what the fuck is going on anymore, and where the story is going. It was a very nice episode, but it left me completely confused.
Why? It can't be that hard to follow, can it?
OK, here we go. At the start of the episode Sawyer and co flashed to an early point of time before settling in sometime in the 70's. Rather than try to explain how they came to be there, Sawyer came up with an alias and a story of himself and co being members of a salvage crew in search of The Black Pearl (that ancient ship that was found back in season 1). Horace gave them 2 weeks to stay on the island, but it would seem the gang decided to stay for good.
Meanwhile, we see that the truce between the Others and the Dharma Initiative is on shaky ground. When Sawyer and co first come across Amy, who works for the Dharma Initiative, she is held captive by the Others and her husband is killed. Juliet and Sawyer then kill the two Others and she takes them back to camp. However, in killing the Others, the truce is broken. In order to make amends, Sawyer works out a deal with Richard. Richard takes Amy's husbands body, and leaves the rest of them alone.
We then see what Sawyer and co have been up to three years later. In that time, they have become full fledged members of the Dharma Initiative. Sawyer and Juliet have fallen in love. Jin has learned to speak English more fluently. Horace and Amy ended up having a child. At the same time, Sawyer and Jin search the island for their friends, whom Jin later finds at the end of "316".
Jack and Co have time traveled back to the same time period. And judging by the promo for the next episode, Sawyer must come up with an excuse for how and why Jack and the gang have suddenly popped up on the island.