In order to create the log file the process running the DevForce services needs write permissions to the log folder. You can do this by granting either the application pool user Id or the IIS_IUSRS group write access to this folder. Do this through either the file system (right click the folder then select Properties-> Security) or through IIS Manager (right click, Edit Permissions -> Security).
The integration with RIA for authentication shouldn't be a problem, as DevForce will use the credentials of the logged in user. I should add though, that unless you've customized the login process the conversion to DevForce authentication shouldn't be too painful, since the DevForce Business Application Template contains authentication/registration features that closely parallel RIA. Even if not using this template you can still pull out the files needed (which we'll provide information on if you're interested).