I've used Kazaalite for while now and have never been aware of any untoward security breach - currently using Norton Internet Security 2003 - nothing detected.
Being a paranoid soul myself, I'm a regular user of Adaware. It sometimes reports spyware in the Kazaalite folder - a file called cd_clint. Don't do what I did and delete it. It's a dummy file placed there by Kazaalite develpors to fool the Kazaa system into thinking the Spyware is there.
Tim