Does Windows Defrag utility reports fragmentation correctly on a RAID system?

Solution 1:

Defrag will report the fragmentation of the logical disk: What this means in terms of how your data is scattered on the physical disks in the array depends on what kind of RAID (0, 1, 5, etc.) and a little on the internals of your controller.

Generally you can probably treat it like you would any other hard drive (i.e. "90%?? For the love of Dog defrag it!"), though at 90% that may be a painful experience.
Also of note: Defragmenting is obviously very disk-intensive. If these are original disks you may want to make extra sure that your backups are good before defragging, just in case the defrag convinces the RAID controller that one or more drives are "failing".

Solution 2:

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.