In 1975, Palillo was cast as Arnold Horshack, one of the misfit "sweathogs" in the high school sitcom Welcome Back, Kotter, whose antics made him one of the standout characters of the series.

[12][better source needed] He returned to New York in 1991, and played such stage roles as Mozart in Amadeus and regionally as George in Who's Afraid of Virginia Woolf?, Arthur in Camelot and Nathan Detroit in Guys and Dolls.

[15][16] As a director, Palillo directed successful productions of the musical Three Guys Naked From The Waist Down in Los Angeles, A Closer Walk with Patsy Cline, and a new edition of Phantom of the Opera at the Cuillo Center for the Arts in West Palm Beach, Florida.

[18] In 2006, his first full-length play, The Lost Boy, the true story of Peter Pan author J. M. Barrie,[19] premiered at the Helen Hayes Theatre in Nyack, New York, and later played at the Queens Theatre in the Park in Queens, New York, and at El Dorado Springs High School in El Dorado Springs, Missouri.

[22][23] On August 14, 2012, Palillo suffered a heart attack at his home and was taken by ambulance to a nearby hospital, where he was pronounced dead on arrival.

[27] A memorial tribute, directed by Lawrence Leritz and hosted by Tyne Daly, was held to honor and celebrate Palillo's life and career at New York City's Triad Theatre on October 3, 2012.