I converted your discussion to a question and moved it to Imagery and Remote Sensing Both might get you more responses. Also tagging Managing Data I agree with Dan that simplifying might be in order, but converting to a file GDB polygon layer before a shape file. It might offer more flexibility and options. Once you have it ready, then export to a shape. Shapes may have other restrictions. As to converting, How Polygon To Raster works—Help | ArcGIS Desktop might be a good starting point.
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