I have the same problem. It started when I bought an iPhone 4S and upgraded from my old 3GS. Now I have three albums on my iPhone: Camera Roll, Photo Library, and iPhone Sync (a folder on my PC that I sync to my iPhone). Photo Library and iPhone Sync have the same photos in it. I've tried to figure out how to delete "Photo Library", but haven't figured out how. It seems like some bug in the upgrade created and maintains a duplicate of my original album. It's not the end of the world, but it's annoying.
Update: In case anyone has thought of turning off all photo syncing and then re-syncing to try to get rid of it, it doesn't work. The Photo Library album is just recreated.
Update 2: While I would disagree with WJosten (earlier post above) that the mystery album has always been there, I agree with what he said about it soring all your synced pictures there. To test, I added another synced folder and all of the pictures from my 2 synced folders are also in the Photo Album folder. I have no idea why Apple would display a "master photo folder" and not give an option to hide it. I'm guessing it's an "undocumented feature". haha