links__system doesn't use URL aliases?
I managed to get around this by using the drupal_get_path_alias function in the end, so my resulting code was:

function THEME_links__system_MENU_NAME($variables) {
  $html = '&lt;select name="" id="dropdown-menu"&gt;';
  $html .= '&lt;option class="" value="home"&gt;Select Item&lt;/option&gt;';
  foreach ($variables['links'] as $link) {
    $html .= '&lt;option class="" value="'. drupal_get_path_alias($link['href']) .'"&gt;'. $link['title'] .'&lt;/option&gt;';
  }
  $html .= '&lt;/select&gt;';

  return $html;
}


Dissapointed I didn't think to search for such a function in the first place!