WCF Windows service permissions problem

Question

I have created a WCF service and hosted it using Windows Services host. To install the project I created an installation project (as described here). In the tutorial, it says to define in the ProjectInstaller.cs the serviceProcessInstaller1 Account property to be Network Service. When using this setting the service did not started on the server. When I tried to start the process manually, it immediately returned to stopped state.
After when I changed the Account to LocalSystem the service works properly. My questions are:

1. Any ideas why it won't work with Network Service account?
2. What are the security implications of using a server with LocalSystem account? This server is used locally in the intranet as a reporting server for other servers.