MS-DTC issues with DB2 in Win XP SP2

I am having some issues with MS-DTC on my machine (Win XP SP2) trying to use XA transactions for DB2 on Z/OS and a SQL Server distributed transaction processing environment. I checked the event log in my machine and I see the followwing error :

"The XA Transaction Manager is in an inconsistent state and cannot proceed. XA Transactions will not take place. Please contact Microsoft Product Support. DB2APP.DLL"

I am not having this in win xp sp1. However, I did notice that I need to do some changes to MS-DTC to enable XA transaction support for XP SP2.

I did follow the steps to verify all the required options are checked in the security configuration tab of MS-DTC. I have Network DTC transactions enabled, Enable XA Transactions is checked, and the DTC Logon account is NT AUTHORITY\NetworkService.
Also, I did create a registry key for the DB2 XA manager (DB2APP.dll). I didnt find any key XADLL under HKEY_LOCAL_MACHINE\SOFTWARE\Microsoft\MSDTC.

But I created one and did follow the steps (also listed in the following link).
http://www-1.ibm.com/support/docview.wss rs=71&context=SSEPGG&q1=windows+2003+XA+transaction+MSDTC&uid=swg21188896&loc=en_US&cs=utf-8 =en

I still keep getting the same ERROR [58005] [IBM][DB2] SQL0998N Error occurred during transaction or heuristic processing. Reason Code = "16". Subcode = "2-80004005". SQLSTATE=58005
which as per the IBM manual is pointing me to microsoft for examining the subcode.

I am not sure how to grant permission to NT AUTHORITY\NetworkService to the folder containing DB2APP.dll as I am not able to find this user in the list of users.

Any suggestions

Please help!