Now, if only it could work with real instruments plugged to the computer.

I haven't seen this in action, but isn't that what these guys do? http://ejamming.com

Just a few weeks ago an extended family member mentioned them to me. He'd been using their software to play with his old bandmates, who are now scattered around the country.

Edit: Here's a link to their "learn more" page, which is hard to find: http://ejamming.com/learn-more/