Eric,
frustrating business ...
offhand suggestions regarding a wholesale spatial adjustment would be:
1. work from copies of the original
2. review the help sections on spatial adjustment thoroughly
3. review the use of snapping
As you observed, rubbersheeting the whole thing can lead to frustrating iterative effects and you may be better off shifting sections of parcels and snapping them to your old ones.
All that being technically feasible, the contractor's statement that the original shapefile was not correctly laid out seems ambiguous in light of the incorrect georeferencing of the photomosaic they used, unless they were given the photomosaic as is. I'd get clarification of that from them. I don't know how much is at stake in the new shapefile or what the intent was, so it is hard to recommend a course of action, but I'd resolve the georeferencing of the photomosaic first. If the new shapefile covers the same parcels as the old one only and with the same attributes, I'd be tempted to abandon it, but I have not seen either except in glimpses from the screen shots. If you adjust the new file the photomosaic will no longer be useful as an underlay for new development areas. At least it is just Pembroke and not all of Ottawa or Toronto.
So to reiterate: I'd not recommend spatially adjusting the new shapefile until you have resolved the georeferencing of the photomosaic. Get the ground control points and double check their coordinates and that they were used correctly to georeference the photos. If there was an error in that find out who was responsible. If the GIS contractor was only responsible for drawing the shapefile they might be off the hook, but it seems byzantine to me.
If you want to upload the two shapefiles, copy them into a new folder in ArcCatalog and see if you can upload that here as a unit or send them to me directly at my e-mail and I'll have a look. As I said I could not do anything with the xml file alone. The photo raster is probably too large.
looks like you've done a thorough job so far.
Hardolph
PS. as an afterthought on spatial adjustment in case you really get stuck into it: avoid rubbersheeting as much as possible and minimize the offset you use if you do by first finding an absolute offset that comes close as possible by using the editor MOVE function to shift all the polygons by some measured and recorded amount (e.g. 3m west and 5m south), or attempt to use a Projective transformation. Again work from copies and if it screws up ditch it and start again. Rubbersheeting should be your last resort.
H