I am pretty sure it does. You can burn a CD of music purchased on the iTMS, then re-rip into whatever format you like, mp3 etc, and the FairPlay tags are removed. There's obviously a quality issue here, but that's a whole other thread.
Yep it definitely works, although you get a reduction in sound quality due to the source format to AIFF to destination format conversion. People do this all the time to get iTunes music onto their mobile phones and such.