CRM 3.0

You need to create a directory, enable write access for the Network Service onto it, modify the registry and iisreset the webserver. Here's the step-by-step guide:

1. Create the directory c:\crmtrace
2. Right click the directory, chose properties and enable write access for the Network Service. Click OK.
3. Open Regedit and navigate to HKEY_LOCAL_MACHINE\SOFTWARE\MICROSOFT\MSCRM
4. Create the following Keys:
   TraceEnabled (DWORD) with a value of 1
   TraceDirectory (String) with a value of c:\crmtrace
5.  Run IISReset

On the next request, one or more files should be created in c:\crmtrace.

See: http://support.microsoft.com/kb/907490 for details. The instructions on that page are for Microsoft CRM 4.0, but most of them apply to CRM 3.0 as well.