Oh, I very definitely think that's in their minds. The idea is that by the time we've dealt with Iraq their own position will have solidified to the point where we are unable to contemplate direct intervention on them. In that regard I would not be too surprised to see a nuclear demonstration as their next step, if they can possibly do it. It won't be in the South China Sea, IMHO - the Japanese really would go ballistic and that would precipitate matters the North Koreans are trying to freeze. Unless, of course it's really far south, say near the Spratlys, but I can't see the Chinese being too pleased with that (although they might put up with it inasmuch as the Filipinos are starting to settle in there).
What that will do is make direct military intervention on our part unacceptably risky from the point of view of our regional allies. These guys really could nuke Tokyo or Seoul. Furthermore, the (possibly 10?) plants they have were certainly constructed as hardened facilities with a regard to just the sort of intervention the Israelis used in Iraq and we used there and more recently in Afghanistan. A few cruise missiles aren't going to penetrate those puppies if the North Koreans are as paranoid as...well, as they really are, and constructed accordingly. Land intervention will light off a fight to the finish between them and us and South Korea with China lurking in the background as half a century ago. Sounds scary, but that may be as good a scenario as they're likely to get.
So it isn't that bad a risk from the North Koreans' point of view now that they're convinced we're serious about intervening in Iraq. In fact it's a darn smart move.
I agree with your assessment.