If you right click on the menu there should be an option to sort by name. This will sort the list with folders on top and single programs on the bottom and then alphabetize them.
In addition to dragging and dropping, you can also navigate to C:\Documents and Settings\*username*\Start Menu\Programs to manually organize your start menu. You will need to replace *username* with the username of your account and you might also have to modify the \All Users\Start Menu\Programs folder as well. This is useful if you want to add your own folders etc. to the start menu.