PHP Code:
<select>
<option><? echo str_replace('&', '&', strtoupper($row['category_name'])); ?></option>
</select>
Although it would be better to replace & with & /AFTER/ you've converted the text to uppercase; escaping is always the last thing you should do, for exactly the reason you're asking this question 
So, better would be:
PHP Code:
<select>
<option><? echo htmlentities(strtoupper($row['category_name']), ENT_COMPAT, 'UTF-8', false); ?></option>
</select>
and then remove the part where you replace & with &
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