I have been working with zizheng on this issue. We have purchased the P&E ICDCFZ debugger and have noted that it appears to work fine. Also, we can access memory (read, write, and mem test with the hardware debugger) and RUN code with CW, it is only when debugging that we see errors (on my machine, CW generally locks up when I try to debug).
We have both been over the hardware extensively and can not find any issue. There are some subtle differences between our design and the 5407EVB, but none of them made any difference.
As for the configuration file, our board is relatively simple, having FLASH, SRAM, and a couple of peripherals. Since we can access the board with hardware diagnostics and run code, I can't see any problem with the config file (doesn't mean there isn't one, I just can't see it).
I tried to reproduce the issue locally, but without success so far.
Are you using a standard Freescale evaluation board or a self made board?
Which version of CodeWarrior are you using(V6.2, ..)?
In your project settings dialog, which exceptions are unchecked in the "CF Exceptions" panel?