Well, for one reason, every time your turn the power off to the RAM, the contents is gone, a so called volatile memory. So, you need at least all the program in the Flash to begin with, even if you want to execute it out of RAM>
Secondly and much more important, you would not want to pay for the chips if the Flash would be 64k and the SRAM 256k, it would probably be double. Last but not least, the combination 256k Flash and 64k RAM is a HUGE RAM. As the SAM7S needs the SRAM to run fast code in ARM mode a part of the SRAM is needed for that. If you look for example at the Philips LPC2000 families of ARM microcontrollers, you will find the SRAM being smaller, biggest reason is that these devices can run full speed in the high performance ARM mode from Flash. Discussions about this and other related subjects can be found in the LPC2000 forum:
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or for the SAM7S here:
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An Schwob