Ouch.
For debugging, have you tried running the msi from a command line without the CDs present? "msiexec /i blahblah.msi /q"? See if it'll run outside of AD without the CDs, I think that's your first step.
You may need to create a transform to pass that SRCDIR property in your GPO. Do that and test it silently with a command line, if it works I'm betting your GPO will too.
Sounds complicated with the extra sources though.