In RoR3, user would like to be able to select a category via autocomplete OR drop down. Example functionality can be found at [url removed, login to view] and screenshot attached to the project.
Current categories use 'awesome_nested_set' gem available at 'git://[url removed, login to view]'. It is NOT necessary to use awesome_nested_set gem, but it would require additional work on your part to replace it with something else. So I would stick with that.
Entering a new category would add that category to the database. It is not necessary to place the new category in the nested set hierarchy.
The drop down would only display top two hierarchical levels of categories.
I use github for a repo. I can provide a base project with the basic category model, or just generate your own. Should take two minutes to create a basic category model yourself.