Great! That appears to work. Quite a simple change that will work for the most of the core app.
Well-written modules should, in most cases, use $wb->page-link rather than directly using PAGES_DIRECTORY, but any that use the constant directly won't work with this method.
But we're not left with much else to try.
Edit:
Unfortunately some core modules (Form & News) and the Admin class use $_SERVER['PHP_SELF'], which will equal the file path above the DocumentRoot. This is definitely not desirable when working with rewrites. $_SERVER['REQUEST_URI'] would be preferrable, but is not supported by IIS (directly), though there are ways to make it work.
It looks like a change to core code would be desirable. I would suggest a new option in settings - Pages URL - that defaults to the same as Pages Directory and sets the constant PAGES_URL. Then no existing code or modules will be broken, and modifications on code can be made to support URL rewriting. Any of the WB developers care to comment?
Since this was turning out to be complicated than first expected I've compiled my findings as an article:
http://westhouseit.co.uk/topics/websitebaker-remove-pages-from-url.phpLet me know what you think and I'll make any changes needed to get it working properly.