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aaaa.. forgot to mention: I have Windows Vista x64
I tried to various fixes using tnsnames.ora. I guess I was doing something wrong somewhere. I resolved it simply by using the direct method.
In Toad click "Session" > "New Connection"
There are 3 options TNS, Direct, LDAP (Shown as Tabs) . Select "Direct"
Password : <passwd>
Service Name: XE
Connect as: SYSDBA
This will let you connect. If you are connecting as non sys user just change Connect As: Normal