Can't add or create categories

I have been having a problem with wordpress which I initially thought was due to the Classipress theme that I am using. My site is not yet properly live as the categories are quite important and I keep having the same problem with them.
I can add so many categories and sub categories and then I am unable to edit or add further categories – the parent box and the update button disappear. I have had some help on the Classipress forum whcih involved reinstalling wordpress and classipress (and losing my categories and having to re-enter all 800 of them!), making sure there are no active plug ins. I am running wordpress 3.0.1 and the classipress 3.0.3. My hosting company is 1and1. My website is https://www.secondhandbabystuff.com
It was suggested that I edit the wp-config file by adding the line
define(‘WP_MEMORY_LIMIT’, ’96M’);
After some searching around the internet it was also suggested that I need to speak to my hosting company to get my php memory increased. They told me to create a file, call it php.ini and save it in my root directory and type in memory_limit=20M and that should to it. (However I am a complete novice at this and created it in notebook – should I do this in another package?)
Another suggestion was to try working in another theme so I tried this with some success using the twenty ten theme which after a little while had the same error and today I have managed a bit more using ‘minimalist’ theme. It has now given up again and I am at my wits end.
Has anyone else had the same problem? I am a complete novice at this so please reply as if I am a complete idiot!
Thanks in advance