From your post I can not figure out the structure - please post the two domains you are dealing with. If you don't want to post the real names, then post examples that corelate to the names.

Example - if your domain is allunix.company.com and the W2k server is company.com then show it as allunix.mycom.com and mycom.com. From your post I only see the one domain since you use "mymachine" which suggest a host, not a sub-domain.

If you are looking to be a slave to the parent domain but a master of the sub-domain, then the parent needs to delegate the sub-domain to you. Look at delegation at Mr. DNS delegation question.
Once that is set up, then you can forward your request to the parent domain and everything should work correctly (since the parent will know that the sub-domain answers will come from your server). Also, your MS admin was correct - setting both servers to be forward to each other would set up a loop that would cause you to lose the function of looking up other domains (and possibly slow your network down too!)

If you are a completely different domain (hidden internally) then you have a different problem.

And, as Mr. DNS states on his page:

When you're down and troubled
and you need a helping hand...
Seek psychiatric help. I just do DNS

(That's the laugh for you)