A new feature in iOS 5 Photos app is the ability for you to create photo albums directly. You can create albums and add photos from your camera roll into them.
One caveat is the albums created on your iOS devices are not standalone folder for you to store your photos. Albums in iOS 5 Photos app is more like grouping or category or tagging for the photos in your camera roll. When you remove from the camera roll photos in an album, the photos are removed from the album. When you remove photos from within an album, the photos stay in the camera roll.