Yes you do need to have read, write, and modify permissions set for the IUSR account on the folder containing the log files.
No you shouldn't have log files saved in the log_file folder in a public folder. For this reason when configuring log files in the includes/setup_options_inc.asp file it says to change the location where the log files are stored to a non-public folder outside the root of your public website.
I would suggest that you place the log files in a parent folder above the folder containing your website on the server. You need to use the path from the forum application to the log file folder.
Change the following line:-
Const strLogFileLocation = "log_files"
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To:-
Const strLogFileLocation = "../../private/log_files"
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Change the part in red to the location you want your log files stored. The part ../ is to move up to the parent directory above the location the forum is located.
Edited by WebWiz-Bruce - 30 August 2008 at 8:57am