Yes, they DO understand.
That's why things are going along as they are, at least as far as Israel itself is willing to push it.
I assure you, if YOU know, THEY know it. To think that they always blab publicly all that they know is ridiculous. There's always Blair and the Euroweenies and Saudi and Egypt and Jordan to pacify, but look at the actual facts, not only this particular bit of rhetoric.
Look at the statements Bush has made that unequivocally show, HE GETS IT!
Oh, good grief, never mind...
Hey - don't "good grief never mind" ME!