They have a huge number of ground troops but not much equipment and are likely poorly trained. For example their air force only has a handful of modern aircraft and although officially its vary large I seriously doubt most of the museum pieces its composed of are still flight capable.
Still, we're talking about 1 milion-strong armies who hate each other, fighting in a largely mountainous area. Whatever the war would turn out to be, one seems certain: it'd be long and very bloody.(that's actually two things, I know)
As for USA's involvement in the case of open conflict, one needs to consider the popular support for sending troops to another combat zone. I'm getting a feeling that after Afghanistan and Iraq, most Americans have enough of wars. This wouldn't be a popular decision for Obama.
And China... I'm not so sure they'd support the Northerners. They've been enjoying good relations wiht SK for almost two decades now, while NK proves to be a troublesome and destabilising neighbour. Maybe they'd just jump on the bandwagon and grab a part of North Korea for themselves? They'd be helping the mutual war effort of the SK and the West, so nobody could really complain. Except Russia, maybe.
I'm still at loss as to the reason for the sinking incident. I can't find a good reason for Kim Jong-il to order such an action, uless there are some cases of faltering patriotism within the Party and the nation. After all, the economic losses are severe.
Or one could embrace a conspiracy-ish theory and assume it actually
was staged by the South, to gain a
casus beli and finally solve the long due problem.