Same issue here -- (x86_64 Ubuntu 7.10 on Lenovo T61p)
If I uninstall kmilo I can configure kmix to use my apple keyboards volume up/down/mute buttons.
The up/down shortcuts work, the mute doesn't. I believe this is because I've set PCM to be the master channel, but the PCM channel doesn't support muting (although I can mute by turning off the headphones switch in kmix).
The annoying thing is that these same shortcuts work great under GNOME. If I uninstall kmix and kmilo and run gnome-keybinding-properties -- I can use the keyboard to adjust the volume as expected. Of course, I don't want to run gnome-keybinding-properties every time I login.
With kmilo I get the 0%-11% volume problem. I think I can live without mute for now, I'll just uninstall kmilo.