I believe so and I think it's called JAM, but don't quote me on that. I'm sitting here reading the latest Xbox Magazine with a special feature of Rock Band in it. The one line in one of the photos says..."Bassists don't get a solo career mode, but they can jam or go head-to-head." So, I would assume that if you can jam with the bass you could do it with all the other instruments as well.
Edit: On an unrelated note, I'm play Halo 3 on Campaign with the IWHBYD Skull turned on and the gunner on the Warthog goes..."THIS IS SPARTA!" as he mows down some grunts. I couldn't stop laughing for 2 minutes straight.