The expression "Вот где собака зарыта" can be translated, as far as I know, as (that is) where the shoe pinches. The literal translation, of course, doesn't match.
So far, my literal (vague) translation amounts to "there is where the dog buries (something)", making reference to an issue that was hidden and suddenly emerges.
I cannot find what kind of word is зарыта, though. That is, it seems to be derived from the verb bury, "зарыть" as lingvo, wiktionary and gramota point out. But what kind of word is зарыта? it doesn't seem to be a conjugation of зарыть, and if so my apologies for not finding it.