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Depends on what you want to do, if you have a home Palace Server that runs on your home computer then No you do not need internet to connect to that Server.
The local server can be reached by two adresses:
127.0.0.1
or
Localhost
both should work in your Palace Client.
you can use this Palace to edit rooms, avatars and test scripts.
If you want to chat to other people from outside your computer you need an internet connection. Either to connect to other Palaces or to get people on your own server.
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Please don't ask me for help in private, use the USER QUESTIONS forum if you need help. 
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