Here is the steps to do it.

1) Install the oracle instant client. Unzip the files to a directory, and then copy the path of this directory to the clipboard.

2) Add this directory to the PATH environmental variable.

• To do this, right click on My Computer,
  
• Go to the Advanced tab,
  
• Click 'Environment Variables'.
• Under System variables, find 'Path'.
  
• Select it, and click edit.
• CTRL-V to paste the directory into the string,
  
• OK.
• Before: %SystemRoot%\system32;%SystemRoot%;C:\Program Files\ATI Technologies\ATI Control Panel;
• After: %SystemRoot%\system32;%SystemRoot%;C:\Program Files\ATI Technologies\ATI Control Panel;C:\instantclient;
  

3) In the same window, under 'User variables for ...', Click the New button. Call the variable 'TNS_ADMIN'. ctrl-v to paste the directory path into the 'variable value' field. Say OK, and close out the 'My Computer' properties windows.

5) Create a file called 'TNSNAMES.ORA' in your instant client installation directory. In this file designate the connection parameters for your database.
Sample TNSNAMES.ORA

CODE
DB_SYSTEM=
(DESCRIPTION =
(ADDRESS_LIST =
(ADDRESS = (PROTOCOL = TCP)(HOST = ipaddress)(PORT =
1521))
)
(CONNECT_DATA =
(SID = orcl)
(SERVER = DEDICATED)
)
)
5) Reset your computer, start Toad, and a new connection. You should see DB_SYSTEM as an option under the database field. Set your username and password, click on connect

Toad is nice tool but i don't like this dependency of Oracle Thin client but I think that is copyright matter with Oracle but it would be nice to see Toad come with Oracle client embedded as one click install .

Happy Querying. :-)