Oh, I totally agree with you (see my cranky post in this forum called "Albums- Bait and Switch?").
If you want actual album functionality, I recommend the app Photo-Sort. It's a very solid app that lets you create hierarchical folders, with copies of pictures from the Camera Roll neatly organized inside them. Pictures can be added, deleted, moved from folder to folder, and renamed. Photos are sorted alphabetically within the folders, so you sort your pictures by renaming them. This is a little bit tedious, but better than not being able to sort at all. Once you have copied a photo into Photo-Sort you can then delete it from the Camera Roll. If you need to have it back in the Camera Roll for some reason, you can copy it back there.
The interface could be a little more flexible, but it's quite a good app for a very reasonable price (I think it was $3.99). But there is no way that a 3rd-party app can be fully integrated with the Camera Roll, so apps like this will always be 2nd best to having Apple provide the functionality.