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If I 1st pull down what they have in place and add the KWs back in categories I'm almost assured of loosing listings.
If I submit the new categories 1st with the intention of taking down the KWs that get accepted they most surely will say that I'm attempting to run duplicate ads for the same KWs.
What to do?
I'd suggest you set up a seperate account for the client and imagine they haven't done anything.
We tried to migrate using existing accounts and it was more trouble than it was worth, it was far easier starting with a blank sheet of paper.
The alternative would be to use Power Posting and Excel the stuff into the existing account.
It's not a problem running duplicates for the keywords, they will only show the one with the highest CTR. it becomes an issue if you are using different URL's (which you probably will be), the landing pages will be different so, to all intents and purposes you will have different ads anyway.
Good luck.