Solution for Napster:

(I stumbled across this while doing something completely different)

Requirements:

Winamp 5.xx http://www.winamp.com
Output stacker http://www.winamp.com/plugins/details.php?id=86033

Go into your winamp options, go into the output section, and select the output stacker. Click configure.
Add the output_ds plugin
Add the output_disk plugin (the output_ds HAS to be the first plugin...)
Configure the output_disk plugin to do what you want (I have it set to force output to .wav, and putting it in a c:\test directory...)
(The output_ds plugin HAS to be at the top of the list, or no go)
Click OK all the way out.

Load up some Napster WMA files (I used files I had purchased, works fine) and hit play.

Yes, it plays the file.
Yes, it also saves it as .wav
Yes, it is real-time encoding. It's slow, but higher quality than burn->cd, rip-> wav.
No, it doesn't use a sound loopback to do it. The quality is exactly as you would expect for wma->wav direct conversion. It is a digital convert in all respects.

(EDIT: I accidentally loaded a track I had not purchased, and it works too. Oops!)