You can also pass on that paltalk does a MD5 intergirty check of the paltalk.exe and some other .dll's, This is very handy to note because unless you send the correct hash to the server you dont stand a chance of loggin in, 2 simple ways around this problem, Do all your patching in memory thus not modifying the paltalk.exe = correct interigrity hash, Other way is to point the check to another file that has'nt been modifyed for example in nice_fox's demostration it would point to an untoched paltalk.exe but looks for paltalk.exd instead of exe, very good and easy to implement..
The hard way around it would be to send a false hash to the server, thus the need to in-line patch a fair bit of code, but the first step would be to check out the packets that are sent from the paltalk client, if you manage to decrypt them hehehe
Good luck with your project and I hope you guys succeed, It would actually be nice to see some yahoo programmers over on paltalk, because from what i have seen there are'nt that many people writting programs for paltalk and never really has been that many...