The microcontroller CPU has a 12-bit instruction set with 3 types of instructions encoded differently. It contains registers like the program counter, accumulator, and status register. The CPU uses a program memory to store instructions and a data memory for operands. It executes instructions in 3 stages - fetch, decode, execute. In each stage, control signals determine which components are enabled to perform operations like fetching instructions, reading operands, and executing ALU operations.