Friend of mine actually did a study on hypnosis in college, and it was discovered that hypnosis, or at least the "It's Vegas and I'm hypnotizing you in front of a live audience" kind all has to do with pressure. It sounded strange to me at first but apparently you are only "hypnotized" because of the subconcious pressure to perform in front of such a large audience. You really do go into a trance of sorts, and you don't seem to have much control over yourself, but apparently it really is all in your head. Plus some people are really "easy" to hypnotize for whatever reason.
As to your music problem, I would think that if you were truly hypnotized, then you would be able to come up with all kinds of new material. I've been a music student since high school, and I can relate to the nervous in front of people mindset, but, like I said, pressure plays a big role in hypnotizing someone. I've seen specials on, heaven forbid, t.v. where people do some wacky things they they wouldn't normally be able to do, so I don't see why you wouldn't be able to transform into some kind of mozart.
Oh and by the way, Ray Charles and Stevie Wonder couldn't read music either, so I wouldn't worry about it. ;-)