Hello, my name is***** and I have over 20 years of experience as a veterinarian. I am sorry to hear about your girl, and I too am amazed that she is still eating, but not surprised she isn't maintaining her weight, given her swollen and ulcerated gums and lips.
Her symptoms can be from severe dental disease and infection or it can be related to an immune system that is over-reacting to the bacteria in her mouth leading to an autoimmune type reaction to the enamel and the plaque on her teeth called lymphocytic/plasmacytic gingivitis stomatitis. This disease process is somewhat responsive to steroids, as they decrease inflammation, so it would make sense that she improved some with Prednisone. But unless we get rid of what her body is reacting to the symptoms will always return.
Treatment if caught early on is a thorough cleaning of the teeth, extraction of those teeth that are damaged and scrupulous aftercare of antibiotocs, oral rinses, and brushing for life. If the cat continues to have pain then extraction of all of the teeth behind the canine teeth (the long teeth at the corners of the mouth) is needed.
If you'd like to read more about this disease process see this link for further information: http://www.dentalvet.com/vets/cats/LPGS.htm
Cats that are also infected with immunosuppressive viruses like feline leukemia, or more commonly feline immunodeficiency virus, tend to have more severe gum disease. Ideally even if she tested negative in the past I would retest her as false positives can happen in younger cats early on in the disease process, and she is outdoors meaning she is coming into contact with other cats. FIV especially seems to cause significant gum disease.
Autoimmune diseases like Pemphigus can also cause mouth and lip ulcers and are responsive to steroids, but lesions return as soon as steroids are stopped so these would be likely possibilities as well.
If she is unable to bring her tongue back into her mouth the other possibility is that she has suffered some sort of trauma which has led to nerve damage or damage to the muscles of the tongue itself. If she cannot properly move her tongue though she should not be able eat or drink properly, and she is able to do those things. So nerve damage seems less likely to be the cause of what you are seeing.
She really needs a hands on physical examination. In the meantime make sure she has soft food to eat and if she will let you using an antibacterial rinse such as CET oral rinse (see this link for examples: http://www.amazon.com/C-E-T-0-12-Chlorhexidine-Mouth-Rinse/dp/B00029XOUC ) may help.
Please let me know if you have any further questions.