After some grace period following the format - the problem came back.
So I did a System Restore, the problem disappeared for a few hours, and then came back again.
I've managed to pin point what exactly is causing the problem inside the dllhost.exe process with the help of Process Explorer (by Sysinternals) and its listing of Handles inside each process.
When the problem happened I went into the list of Handles inside dllhost.exe and started closing handles one by one to see after which one the problem disappears.
It turns out to be something called "ALPC Port/RPC Control" (Screenshot attached)
I really hope this info will help in figuring out this annoying problem.
Apparently it has something to do with codecs installed on the pc - in my case it is K-Lite.
I've uninstalled and things got back to normal - and when I installed the codecs again (I've tried different codec packs) it came back.
Furthermore, now there is another problem of "COM Surrogate has stopped working" with this error event:
"Faulting application name: DllHost.exe
, version: 6.1.7600.16385, time stamp: 0x4a5bc6b7
Faulting module name: RPCRT4.dll
, version: 6.1.7601.17514, time stamp: 0x4ce7ba59
Exception code: 0xc0020043
Fault offset: 0x0005cd99
Faulting process id: 0x778
Faulting application start time: 0x01cdbf761de92209
Faulting application path: C:\windows\SysWOW64\DllHost.exe
Faulting module path: C:\windows\syswow64\RPCRT4.dll
Report Id: 5cc678d8-2b69-11e2-a5c6-dc0ea12f8458"
And so I've followed these instructions: http://helpdeskgeek.com/help-desk/fi...-in-windows-7/
And I'm trying to figure out if it helped.