The 8086 microprocessor is a 16-bit processor that can address up to 1MB of memory using a segmented architecture. It is divided into a Bus Interface Unit that handles fetching instructions and transferring data, and an Execution Unit that decodes and executes instructions. The BIU uses segment registers to map the physical memory addresses and fetches multiple instructions using pipelining to overlap execution. The EU contains registers like AX, BX, CX for data and flags for status.