You cannot create a contact in Microsoft CRM 1.2

In Microsoft CRM 1.2, a user does not have the privilege for creating accounts but does for creating contacts. The problem occurs when the user creates a new Opportunity record. Although the user has the privilege for creating contacts, when you click the Lookup icon to specify the value for the Potential Customer field, the New button at the bottom of the Look Up Records dialog box will be inactive.

Microsoft CRM has a fix for this problem that is part of a cumulative update. The cumulative update information is described in the following Microsoft Knowledge Base article: