Services Reliability
The last area of reliability improvements is in the area of the services infrastructure. Prior to Windows 2000, some services shared a process with other services and some ran in their own process. Windows 2000 introduced the generic service host process, Svchost.exe. The goal was to reduce system resources by consolidating the various processes hosting built-in operating system services into a single process. Or, it could permit the system administrator to configure the system to run certain services in their own processes, which would prevent one service from corrupting the private memory of other unrelated services (this capability is not documented or supported yet).
If you look at the Windows XP process list in Task Manager , you will notice at least four Svchost.exe processes: two running under the SYSTEM account (sometimes referred to as LocalSystem) and two running under two new service accounts: NETWORK SERVICE and LOCAL SERVICE.

One of the two Svchost processes running under SYSTEM hosts the bulk of the services, 29 of them in total. The second one hosts a single service, Remote Procedure Call (RPCSS). The reason this service needs to be in a separate process is that user-written DLLs are loaded into this process. By having RPC running in its own process, these DLLs cannot adversely affect the operation of the other built-in operating system services. The Svchost process running under NETWORK SERVICE hosts a single service, the DNS Client. The Svchost process running LOCAL SERVICE hosts the TCP/IP NetBIOS Helper, Remote Registry, Simple Service Discovery Protocol, and Web Client services.
The reason for the two new service accounts is to improve system security by reducing the privileges that services run with. LOCAL SERVICE is a built in account that doesn't need a password to log on. The account has only a few privileges, and is not a member of the local administrators group. So, if a service that is running under this account is compromised, it cannot take down the whole machine. LOCAL SERVICE also has no network credentials, so attempts to access a machine on the network will connect with the null session. The NETWORK SERVICE account has the same set of privileges as LOCAL SERVICE, but has access to the machine's credentials for outbound connections, similar to the SYSTEM account.

Source: http://www.computing.net/security/wwwboard/forum/272.html