Categories hold Categories or Products ... never both ...
Once a Product is added, the NEW CATEGORY button will disappear ...
Go to the Tools ... Install SQL Patches and run the command:
Code:
UPDATE products_to_categories SET categories_id =1;
Now, go to the Catalog ... Categories/Products ... and create a Category ...
In theory, when done, the Products will show up in the Category that you made ...
Now, go to the Tools ... Store Manager ... and run the Update Master Categories ... this will set those Products so that their Master Category is set to the Category you made ...