The execution unit performs logic and arithmetic operations on memory or register data. It receives instructions from the prefetch queue and decodes them, then temporarily stores information in register arrays. The execution unit contains an ALU, general purpose registers including AX, BX, CX and DX, special purpose registers, pointer registers SP and BP, and index registers SI and DI. It performs operations like AND, OR, addition and subtraction on 16-bit data. The flags register stores status flags from the last arithmetic or logical instruction, including carry, auxiliary, parity, zero, sign, and overflow flags.