Hello
Which processor are you targeting (Coldfire, EPPC82xx, ...)?
Basically internal RAM target loads code into RAM , whereas Internal Flash target loads code into the chip internal flash.
Depending on the processor you are targeting, You may be able to set 1 ot 2 breakpoints even when the application is loaded into Flash.
Basically you can debug in flash, but there are some limitation due to the hardware.
CrasyCat