So say we have the encoded single qubit
$$|\psi_L\rangle=\tfrac{c_0}{\sqrt{2^3}}(|000\rangle+|111\rangle)^{\otimes3}+\tfrac{c_1}{\sqrt{2^3}}(|000\rangle-|111\rangle)^{\otimes3},$$
And then say a bit flip occurs on the 4th qubit so now we have
$$|\psi_L \rangle=\tfrac{c_0}{\sqrt{2^3}}((|000\rangle+|111\rangle)\otimes(|100\rangle+|011\rangle)\otimes(|000\rangle+|111\rangle))+\tfrac{c_1}{\sqrt{2^3}}((|000\rangle-|111\rangle)\otimes (|100\rangle-|011\rangle)\otimes (|000\rangle-|111\rangle))$$
Then we add the ancilla qubit $|0\rangle$, giving
$$|\psi_i \rangle=\tfrac{c_0|0\rangle}{\sqrt{2^3}}((|000\rangle+|111\rangle)\otimes(|100\rangle+|011\rangle)\otimes(|000\rangle+|111\rangle))+\tfrac{c_1|0\rangle}{\sqrt{2^3}}((|000\rangle-|111\rangle)\otimes (|100\rangle-|011\rangle)\otimes (|000\rangle-|111\rangle))$$
Performing the first Hadamard gate in your diagram gives
$$|\psi_i \rangle=\tfrac{c_0(|0\rangle+|1\rangle)}{\sqrt{2}\sqrt{2^3}}((|000\rangle+|111\rangle)\otimes(|100\rangle+|011\rangle)\otimes(|000\rangle+|111\rangle))+\tfrac{c_1(|0\rangle+|1\rangle)}{\sqrt{2}\sqrt{2^3}}((|000\rangle-|111\rangle)\otimes (|100\rangle-|011\rangle)\otimes (|000\rangle-|111\rangle))$$
Performing $Z_4Z_5$ gives
$$|\psi_i \rangle=\tfrac{c_0(|0\rangle+|1\rangle)}{\sqrt{2}\sqrt{2^3}}((|000\rangle+|111\rangle)\otimes(-|100\rangle+|011\rangle)\otimes(|000\rangle+|111\rangle))+\tfrac{c_1(|0\rangle+|1\rangle)}{\sqrt{2}\sqrt{2^3}}((|000\rangle-|111\rangle)\otimes (-|100\rangle-|011\rangle)\otimes (|000\rangle-|111\rangle))$$
Performing the second Hadamard gate gives
$$|\psi_i \rangle=\tfrac{c_0|0\rangle}{\sqrt{2^3}}((|000\rangle+|111\rangle)\otimes(|100\rangle+|011\rangle)\otimes(|000\rangle+|111\rangle))+\tfrac{c_1|0\rangle}{\sqrt{2^3}}((|000\rangle-|111\rangle)\otimes (|100\rangle-|011\rangle)\otimes (|000\rangle-|111\rangle))$$
Now we take a measurement in the $\{|0\rangle, |1\rangle\}$ basis. At this point I'm confused. Does it mean that we use a projective operator, say for $|1\rangle$, $P_1=|1\rangle \langle1|$, then we see what the probability of this is using $\langle\psi| P_1 |\psi\rangle$? And if the probability is 1 then the eigenvalue is -1, and if its zero the eigenvalue is +1.
Note: When I understand it fully I'll edit this so it's a complete answer.