My friend lent me a game and the instructions say that I have to "copy the crack from CD to the installation directory". How do I do this?

It means you have a CD-R Copy of a game and should probably not ask for advise on this forum since it is against the rules as far as I know. If you had the original disk you would not need the crack.

yeah it's generally a hacked .exe file or program that makes the game skip the copy protection scheme. In other words, you don't have a legal copy of the game. I'm sure you can google for more info if you want.