Yes it does report correctly.
I should point out that the only time I've seen such severe fragmentation on a windows volume is when Shadow Copies are being stored on the volume.
Find some space on a drive that isn't fully partitioned and move the shadow copy storage area to a freshly created volume that is dedicated to holding the shadow copies and see if your fragmentation drops by a huge amount without even defragmenting the volume that is currently showing ~90% fragmentation.
Assuming you are using Shadow Copies they should never be on the same drive as the source file they are copying.
If you aren't using Shadow Copies the next most likely culprit is a Backup application like Backup Exec storing backup files in too small of a chunk.
Though really any program that creates medium to large size files and then deletes them on a regluar basis could create the same situation.