In Survivor: Palau, Katie was part of the dominant Koror tribe and a member of one of the longest-lasting alliances in Survivor history. Her core alliance with Tom Westman (the eventual winner) and Ian Rosenberger was formed on Day 1 and continued until Ian was voted out on Day 38. In addition, Katie was aligned for a time with Gregg Carey and Jennifer Lyon.

Katie's strategy was to align with strong players and decision makers, which she believed would help her survive until the end of the game. Indeed, her allies, Tom and Ian, together won every individual immunity challenge, and her tribe, Koror, won every tribal immunity challenge. Although Katie was not a physical threat, and although she had heated confrontations with fellow castaways Caryn Groedel and Janu Tornell, both of whom accused her of being mean-spirited, Katie's strategy did appear to work and she survived all the way to second place.

Katie was closest to Ian, her best friend in Palau, although the two did clash over, among other things, Ian choosing to share a reward he won with Tom instead of with Katie, and over Ian's plan to vote out Tom if Tom lost immunity. Ian and Katie eventually reconciled, and Ian gave up his chance at the million-dollar prize in order to let Tom and Katie go to the Final Two together.

Tom was the winner of Survivor: Palau by a vote of 6 to 1. Even Katie's best friend, Ian, voted for Tom to win. Katie's only vote came from Tom's nemesis, hairstylist Coby Archa.

During the airing of Survivor: Palau, many posters of the "Survivor Sucks" message board ridiculed Katie for being fat and very nasty and cruel to her tribemates. Some actually believed she had gained weight during her Survivor experience.

On September 1, 2005, Gallagher was arrested in her hometown for DUI.