They read world opinion well. They turned down essentially what they asked for, started the infitada, and it cost them nothing.
And they moved the starting point for "negitiations" forward. Even GWB BEGINS with the offer they turned down. What did they lose, a few martyrs?
From the perspective of the terrorists (and they have time on their side) they think they're winning, against Israel, and against the US.
Peace will only come after a decisive victory on the ground.