For me and my users, it's very broken. Without including the icon image, it's difficult to discern various tools, and with no way to maintain the location of tools within a palette, it makes it difficult to locate similar tools. Since it's so difficult to use the tools, my users tend not to use them and use less-desirable workarounds.
Besides, ribbons seem to be the way that most software is going, so I think it'd be better to work in that direction than to continue with toolbar and tool palette formats that I doubt will see much more support or enhancements.
I agree that converting existing palettes would be nice, but maintenance of new ribbons will be much easier once they are made. I think there's no conversion avaialble because the ribbons offer so much more functionality that palettes and ribbons just don't really translate well.