Solution: I had a big scare with this one because none of the spyware / antivirus software picked up anything even though the system was really really slow and the CPU was busy 100%. Turns out the printer spooler process spoolsv.exe was taking up all the CPU. The solution is pretty simple although it took me quite some time to discover it .
There is no need to delete the spoolsv.exe file. Otherwise you will not be able to print anything. There will be some pending print processes which need to be cleared. Go to Start->Printers, check all the printers for any waiting print jobs. Check especially in Micosoft Image Writer (if you have one). Cancel all the pending print jobs and the system will be back to normal.