It depends on the method you use. If you use the original head tracking system then, yes, it only tracks on two axis. If you use the newer PS Move method, all rotations are captured accurately. One user was even able to get good results using a Wii Motion Plus with iPi Mocap Studio, and this was before the feature 'officially' existed. (In general, you'll get far more accurate results with the PS Move though.)
We used the PS Move method to animate the head and hands for
the B2 excerpt we released last year. (Since we finished
'Scareplane' last week, we're finally going back to finish 'B2' now. Yay!) :)
Speaking of unusual bodies, the characters in our cgi shorts, 'B2' and 'Happy Box', have very grotesque proportions. In my experience, retargeting for characters like this will work but you will want to tailor your performance for these proportions. For example, I had to imagine I had an incredibly big head to avoid having the characters 'punch' themselves in the face whenever an arm was raised. This sort of thing is easy to correct in an external 3D program that supports control rigs or if you design your final character rig for mocap offsets and overrides.
G.