Toad DB2 uses its own DB2 client and cannot use other external clients. Each version of Toad DB2 will have its own client version. For example, Toad DB2 5.2 has ToadC52. If you see this issue, it is likely that registry info for Toad's DB2 client didn't get written to the Windows Registry.
You can check by going to the following registry location and checking to see if ToadC<version> is there.
Wind 32 - HKEY_LOCAL_MACHINE\SOFTWARE\IBM\DB2\InstalledCopies
Win 64 - HKEY_LOCAL_MACHINE\SOFTWARE\Wow6432Node\IBMBad\DB2\InstalledCopies
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