paulmon 2 is a program which you put into eprom/eeprom program space. it basically allows you to put your own program into the ram portion of the mcu device to make it easier to reprogram your own code while testing. when using this type of system because your own code is only stored in ram it will disappear when you turn the power off.
paulmon 2 is used as a debugger through hyper terminal, if you do use it then when you are satisfied with your own code you would erase paulmon2 and reprogram the eprom programming space with your own code.
its not necessary, it can just help to debug your program. i would try without it first, then if your code doesnt work as expected, use it to find out whats going on.