I don't know much about the waveforms and the such, but I do a ton of work with producing programs, and mostly anything is possible in reading a live recording. With today's environment of using software for many things(compressors, equalization, and even preamps) it would make plugging a real guitar into your t.v much easier. The only problem you'd face is getting everyone a small soundcard that converts your analog to digital for use in your game.

I always wanted to make a game like this, but instead of just guitar, allow any instrument, since you'd be plugging in 1/4th analog anyways. You could have a mic, piano, and guitar. Drum sets work with either mic, or if their electronic, straight analog. Wouldn't it be great to jam with real instruments online? There is tons of musicians out there that actually know an instrument pretty good but don't get the chance to play with others for many reasons.