I'm assuming you are on windows.
To run a server, download this: http://kaillera.com/files/kaillerasrv-0.86-win32.zip
... extract all the files inside it. ... and run the .exe file and keep the console window open that pops up.
To connect to that server from local machine, after you activate kaillera from mame and the server refresh screen shows up, press the stop button if its pinging servers. Click on "Custom IP" button, type in "localhost" in the box and click connect.
To connect from a machine in your local network, do the same as above but this time put in network interface ip address of the server machine on the network connecting the two machines instead of "localhost".
You will only need to host one server.
I slipped up. I lack discipline!