I have a third gen iPod hooked up to the Aux In via the origional iPod docking station with analog inputs and it works great in both zones. The third gen dock connection is direct and not affected by the iPod volume level.

Not familiar with the Kensington but I would check the things gonk suggested as it seems that may be the problem. Also I know it sounds simplistic but make sure you have the correct source selected on the zone 2 menu, I made that mistake a couple weeks ago and it drove me crazy until I figured out I had inadvertantly selected the wrong inout.