The component works as expected, but the debugger says it cannot find the source files for source-level debugging.

Debugging components API in standard libraries works fine.

Any ideas ? 

Debbugger cannot find source files only if the component is in a library project.

If the component is in a design project it works fine.

I'd like to develop a library debugging it in place..

 I was wrong: it seems the debugger has bigger problems.

It cannot locate the source file if the parameters of the function you are stepping into have more than one pointer.

Try to step into these functions, even in THE SAME file:

void bugs(int *i, int *j)
{
    while(i!=j);
}


void nobugs(int i, int j)
{
    while(i!=j);
}

That's pretty fucked up for a debugger!

Who debugs the debugger ? That's the question!

Can you switch the debugging to use JTAG? Maybe this helps (see http://www.cypress.com/?id=4&rID=38481 )