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I think the recommended method is to use Conversion Tools - To Geodatabase - Import from CAD. I like adding the dwg to ArcMap and exporting the line layer (usually) to shapefile, since that creates a field in the shapefile that distinguishes the different drawing layers.
I would suggest that you first make sure your dwg is properly projection defined, which creates a prj file. It seems to me most engineers and quite a few surveyors never provide a projection definition to their dwgs, which often requires contacting them IF it even has one. If it has one but you can't contact them, you can try different data frame coordinate systsems until it lines up with some properly projection defined layers in ArcMap, and then use that definition. If it wasn't created in a coordinate system then you will need to georeference the dwg. See Georeferencing CAD data.
I would also suggest that your autocad guy exports the file in a version that Arc 9.2 can read. AutoCad just released their new version of software that if exported to a dwg, 9.2 will not read. They would have to save down a verison down so to speak. Can't tell you how many times we've run into that issue from different vendors.
Thank you Falltroy and John your advice is much appreciated.
If only I could convince our Engineers to use Arc, life would be so much easier!