I was able to successfully do this manually. The easiest way is to switch to data sheet view, copy the content to Excel. Then sort your list. Delete the rows in the original list and paste the sorted content back from Excel. As your new list items are added on paste, the Item ID is assigned in the order pasted. Viola! Your lookup dropdown is alphabetical.
SP2010 & Office2010
Edit: Repercussions!!-The lookup column that used this list lost all the data. I had to go back and restore the list items. So, be careful with lookup columns.