Ok there are a couple of things you might want to try:
First of all try this link and do a sasser worm check
http://www.microsoft.com/security/incident/sasser.asp?
And run Stinger as well it will do a deep scan of your system for trojans etc. Make sure you add any disks that are missing in the list:
http://vil.nai.com/vil/stinger/
Then you might want to take alook at this Virus scanner solution from bitdefender, its very modern and clever. It also has an excellent FREE edition:
http://www.bitdefender.com/index.php
Before you do anything after this check your system for spyware. Get Ad aware from Lavasoft:
http://www.lavasoft.de/
Just use the free edition and make sure you update it with the internet link to get the latest check file.
And for the final touch: get a good firewall to make sure this never happens. Personally I would recommend Zonealarm Pro but if you can't afford it the Zone Alarm free version is excellent to.
http://www.zonelabs.com/store/content/home.jsp
As for the Palace client, just stick to the basic Palace client you can get on this site or thepalace.com. Windows XP has an option you should turn on: find the palace.exe file, its names either thepalace.exe or palace32.exe. Right click and select the properties option.
In properties you can set "compatebility mode" set this to Windows 2000 this will make your Palace client behave a bit mre under windows XP.