This appears to have been fixed in hardy heron

$ pwd
/srv/cache/tbielawa

$ cat test.tex
\input{$REFDIR/a.tex}

$ cat fake/a.tex 
\documentclass{article}

\begin{document}

omghi2u

\end{document}

$ export REFDIR=fake

$ latex test.tex 
This is pdfTeXk, Version 3.141592-1.40.3 (Web2C 7.5.6)
 %&-line parsing enabled.
entering extended mode
(./test.tex
LaTeX2e <2005/12/01>
Babel <v3.8h> and hyphenation patterns for english, usenglishmax, dumylang, noh
yphenation, loaded.
(./fake/a.tex (/usr/share/texmf-texlive/tex/latex/base/article.cls
Document Class: article 2005/09/16 v1.4f Standard LaTeX document class
(/usr/share/texmf-texlive/tex/latex/base/size10.clo))
No file test.aux.
[1] (./test.aux) ) )
Output written on test.dvi (1 page, 220 bytes).
Transcript written on test.log.


running the output test.dvi through xdvi shows a document with the words
"omghi2u"

for reference:

libkpathsea4:
  Installed: 2007.dfsg.1-2
tetex-bin:
  Installed: 2007-13

** Attachment added: "test.dvi"
   http://launchpadlibrarian.net/14673478/test.dvi

-- 
libkpathsea4: path expansion when referencing files
https://bugs.launchpad.net/bugs/132738
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