The 8086 microprocessor is a 16-bit processor that can access up to 1 MB of memory. It has two main components - the Bus Interface Unit (BIU) handles bus operations like instruction fetching and memory access, while the Execution Unit (EU) decodes and executes instructions. The BIU contains registers for the code, data, extra, and stack segments as well as an instruction queue and pointer. The EU has registers for accumulation, base, count, data, indexing, and flags to indicate results. It decodes instructions from the queue and performs operations with its ALU and registers in a pipelined fashion.