I'm just posting what I learned so that it might benefit the community. If you want to execute LWIP applications without DDR2 you must be aware of the following:
The architecture only offers SDMA connectivity between DDR2 and the TEMAC. If don't want to have DDR2 memory, then you must use the xps_ll_fifo to allow non-DMA access to the TEMAC. It is fairly simple to add this fifo to the XPS project. LWIP software detects the change from SDMA to FIFO automatically.
When updating the SDK linker script to assign program sections to SRAM, be aware that SRAM_C_MEM1_BASEADDR is actually a flash device! (I'm talking about the ML507 board) You can only assign sections to the SRAM_C_MEM0_BASEADDR which is the 1 Mbyte SRAM.
Here is a somewhat unrelated note regarding running the Raw LWIP demo on a microblaze: If you get this error message when compiling:
multiple definition of `_interrupt_handler'
Disabling relaxation: it will not work with multiple definitions
Then try removing the xilkernel library from the SDK project build settings.