If it works serially then maybe it's a problem with parallelisation as SSAS is sending multiple queries to SQL Server on a 2 CPU box

I've had issues with DTS where I have had CPU locking (never had this with SSAS as I've always had them on seperate boxes). You could look to try adding MAXDOP to your SQL queries

http://blog.sqlauthority.com/2010/03/15/sql-server-maxdop-settings-to-limit-query-to-run-on-specific-cpu/

You may need to reduce the number of threads SSAS opens when processing (I believe you increased this and it may make the issue worse)

http://technet.microsoft.com/en-gb/library/cc966527.aspx

Serially processing may well be fine if it doesn't add too much time to your overall processing but it'd be good to understand what the issue is

Less helpfully (unless you work for HP and you have servers coming out of your ears) Microsoft do recommend that SSAS & SQL Server are on different boxes. Splitting them up may help

Mack