Thanks for the reply.
I would run it on the live server but we cant risk any performance problems and we dont have a spare drive in any case. There are many warnings against doing this such as in BOL (Auditing SQL Server Activity). i.e. where the recommendation is to use a non-production server.
I dont necessarily want to run a server side trace, rather to automate SQL Profiler running on a test server but logging activity on a production server. Of course it seems that it can only be automated using a server side trace.
Also there is a suggestion that client sided traces utilise considerable b/width ; http://sqlblog.com/blogs/linchi_shea/archive/2007/08/01/trace-profiler-test.aspx
So it seems that there will be a significant performance hit in our case with either method.