connect vie SqlPlus hangs when running a service as an Active Directory account

when I run the database service as Local System, I have no problem connecting to the database via sqlplus

However, when I change the service to run as an AD account, the connection hangs.

For instance: 

sqplus /nolog

connect sys/xxxxxx@fred as sysdba

I have given the service account full rights to all files in the Oracle install directory

Here are entries in the tnsnames.ora.  it seems the same in either scenario

==========================================================================

## I set the service to run as Local System

22-AUG-2013 09:00:12 * service_update * fred * 0
22-AUG-2013 09:02:27 * service_update * fred * 0
22-AUG-2013 09:02:41 * service_update * fred * 0
22-AUG-2013 09:02:55 * service_died * fred * 12537
22-AUG-2013 09:02:59 * service_register * fred * 0