Thanks for the suggestion but ....
I am using Ubuntu.
Therefore $(LazarusDir)\components\mouseandkeyinput\folder means
/usr/lib/lazarus/1.6/components/mouseandkeyinput (Ithink - or at least that is the only mouseandkeyinput folder on te system).
There is no .lpk file in there.
Lazarus is already aware of the dependency (it won't compile the program) but it can't find th package file (because it isn't there).