Kind of. In iOS 5, you have pictures in the Camera Roll. You can make folders for these pictures, but the app is making links to those albums; it's not actually moving the photos to them. So, everything still shows in the Camera Roll ... and in the album. A bit clunky, but still better than having everything in the Camera Roll with no way to sort them out.
With a jailbreak - you can buy the Cydia tweak PhotoAlbum+ ($6.99, USD), which will let you create albums. And, this tweak will actually move the photos from the Camera Roll to the album(s) - no links.
Hope this clarifies. And, No1zeppelinfan, take a look at the tweak, also. If you decide to jailbreak (which you can, tethered, because of owning an iPad1) - this may be what you are looking for.
Marilyn