Yes, it works exactly as advertised.
And yes, it can track individual finger joints. Violin? Maybe. Xylophone, drums, and piano; definitely.
The tech has a bright future.
And not just for gaming, as the core tech behind Kinect is computer vision and voice recognition; it uses a lot of the same algorithms in the MS Surface efforts and they have all sorts of ongoing efforts to explore immersive computing. One of them is a "computer room" where every wall is in effect a screen and your gestures control everything, another is using a set of sensors and pico projectors to turn an arbitrary surface into a computer.
It's great tech but there's no telling just what, if anything, will come of it, long-term.
(Besides gaming and TV controls; some TV makers are looking to license the sensor tech.)
Lots of companies come up with interesting tech and demos that don't get anywhere because they're ahead of the times (Rocketbook and Softbook come to mind) or aren't properly deployed and get targetted at the wrong market (MS has been doing excellent TabletPC OSes and software for a decade but its hardware partners have only used it for vertical markets and corporate computing, totally ignoring its natural fit for academia).
Just this week we got a full authopsy on Microsoft's Courier project and it highlights how corporate decisions can torpedo even the most promising of techs. So nothing is ever a sure thing. But the Kinect sensor tech has a way better than average chance to proliferate because it is coming from the low end, it already has achieved commercial success and 10-digit sales, and it s capturing the hearts and minds of future end user cohorts. (There isn't a 5 year old that can resist Kinectimals.
)
Word is next year we'll see computers and monitors with short-focus Kinect sensors embedded and full Win8 support so the tech is about to get a lot more serious and productive.