Option 1: attack, and get incinerated in a few days.
Option 2: Try to bluster, and hold on to power as long as you can.
Option 2 let's you live longer.
Not responding to a foriegn attack on NK soil is not an option for Kim Jong Il. The government would lose its grip on the country within days, due to internal reasons, and the leadership knows it.
This leaves, as an option, war. The attack south is very high risk. The North Koreans know they probably can't take the entire South, but may try to blitz Seoul, occupy it, and go to the U.N. and request to negotiate. (By this point, they will likely have a few thousand US prisoners, to sweeten the deal.)
Bear in mind that as much as we'd like to see it, the U.S. won't use nuclear weapons on the North first. It would be a short term win, but it would be political suicide for us in Far Asia. Winning the war to lose the peace is not on the Bush agenda.