I created my merge modules with the Destination Folder specified as ".", so that the location could be overridden by the parent install. I specified the Destination for each of the components to be relative to [INSTALLDIR] (i.e. [INSTALLDIR]\Bin, [INSTALLDIR]\Doc, etc.).
In my main install, I have tried using [INSTALLDIR] as the Destination Folder, and I have tried creating global path variables in the Power Editor, under Directory, and using those variable names (putting them in square brackets where I attempt to use them, and I also tried using all caps and regular case), and neither worked. Most of the time, my destination for the merge modules shows up as C:\ or C:\MyVariableName\. When I have been able to make it install to a different directory, it seems to not reinitialize the target directory for each merge module. For example, if I specify D:\MyDir as my destination, then the modules that should go into D:\MyDir\Bin are correctly placed. However, a merge module that depends on those modules (in this case, a code sample) which should be installed into D:\MyDir\SDK\Samples gets put into D:\MyDir\Bin\Samples instead.
I have tried so many variations that I have lost track of which ones have come closest to making my install work properly.
Back to the ISWI defect: The workaround states that I should append the merge module GUID manually to INSTALLDIR. However, when I look in my Merge Module project under Advanced Views / Components / <component> / Advanced Settings / Application Paths, there are no entries there, and the drop-down list for File does not contain any files, even though there are files linked to this component.
Thanks in advance for any suggestions you have. :)