Troubleshooting Callout

1. Grant the account that is running the CRMAppPool application pool the Full Control permission for the following folder:
C:\Program Files\Microsoft CRM\Server\bin\assembly

2. Change the SetupMode registry subkey too.
HKEY_LOCAL_MACHINE\Software\Microsoft\MSCRM

3. Re-add CRMServices web service from Visual Studio.Net

4. Set output to file system, for example: PostUpdate

TextWriter log = TextWriter.Synchronized( File.AppendText @"C:\CRM_SDK_Drop\Update.txt"));
log.WriteLine("PostUpdate");
log.WriteLine("ObjectType: " + entityContext.EntityTypeCode.ToString());
log.WriteLine("ObjectId: " + entityContext.InstanceId.ToString());
log.WriteLine("CreatorId: " + userContext.UserId.ToString());
log.WriteLine();
log.Close();

5. Debug:
Callout assembly: w3wp.exe, (don't forget PDB file)
Workflow assembly: CrmWorkflowService.exe , (don't forget PDB file)
Also, see these useful links:
http://blog.sonomapartners.com/2007/03/is_your_microso.html
http://ronaldlemmen.blogspot.com/2007/01/callout-not-working.html
http://support.microsoft.com/kb/933842