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Oh good, you know what a transistor is!

Basically your CPU is a processor designed to process general tasks and calculations. There are libraries of "instructions" which is just a list of the things you can ask it to do. You'll never use these unless you write assembly code for the CPU.

So, a CPU is designed to run programs. The cpu contains something called registers, which allow it to store small amounts of information. There are data registers and instruction registers. The instruction registers are very important because they tell the CPU what instuction it should follow. Next, there is a register called a program counter which contains information on where to find the next instruction. So, when the CPU computes the current instruction, it then loads new information from the program counter.

I mentioned data registers. The data registers are mostly changed by instructions, which either tell the cpu to get new data from the computers memory, or add data registers together to get new data.

That's the basic core logic, really simplified of course. If you want more info go to wikipedia. Also look up pipelining, and CPU cache.
 
Check This Link for the basics.

In very short, the CPU is designed to execute (or transform) a set of inputs to outputs.
It has a set instruction set it can execute (x86 and the SSE extensions mainly).

When ever you want to do something on your system it generats input data, in the form of operations, which are stored in your system memory.
These operations are fetched from memory and given to the CPU.
The CPU then splits this operation up into its most basic parts and send these parts to the proper sections of the CPU.
These CPU sections do their transform tasks and send the output back to memory.

In reality, it is quite a bit more in depth than this.
I am sure it can be greatly clarified and broken down more but, at its basic, that is the how the CPU does its magic.
 


I believe Outlaw has provided a a very useful basic explanation of how a CPU works. However; I have always looked upon that process in this way.

http://img219.imageshack.us/img219/9259/monkeystealspeach1qz8.jpg


monkeystealspeach1qz8.jpg



 

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