I don't think there is going to be a fix for 6.3 this being said I must say that I have mistaken the implementation as a bug rather than a bad feature.
The current implementation did let you sort images regardless of hierarchy which could (theoretically) be useful when you have a gallery widget and display a gallary with its children.
The fix, which I think is in this week's internal build will have the best of both worlds.
No longer will be parent and siblings of the selected library be shown, but the child library images would be included. And through the grape vines I heard that this could be improved even in future releases, but that's not a given.
So Telerik - Sorry for me not realizing why this was happening but thanks a whole heap for making the changes which will improve usability for 99% of my clients.