I have to admit, I am like TM when it comes to the subtilties of a woman flirting with me...it goes right over my head, no matter how blatant my wife says it was.
"I just want some general opinions of how you all perceive this situation. Do you think that...."
1) She knows that I consider it being flirty when she does the things I have mentioned...No, how could she know what you think/consider being flirty unless she is a mind reader or you tell her? Try commenting next time she flirts with you about what a little flirt she is being and pay close attention to how she responds...what she says, her body language, etc. I would do it privately first, so as not to possibly emabarass her in front of her your wife or her husband. If she continues the flirting, I'd take the first chance to call her on it in front of both the others....something light-hearted and playful, like "Are you flirting with me?!"
2) He knows about her being flirty and interested in me as more than a friend.
Yes, I think he knows somewhere inside himself, whether he admits it or not. He may just be choosing to ignore it, figuring it's just a playful, friendly type thing his wife is doing.
Finally, I think and believe this type of behavior could cost a friendship because it is not "out in the open" with all 4 adults. Granted, things have to start somewhere, but I personally feel they should start with open and honest communication between partners and then between any other person(s) involved...in this case it is 2 couples rather than a couple and a single.
Playing the guessing game is just that...a game. Hearts get broke over games, friendships have been ruined over games (and I mean literally games, like cards, football, etc.) The dating/mating game only makes the situation more dangerous if there is not open communication going on presently amongst all 4 of you. If you are good friends, you should be able to start up a conversation about this and clear the air rather quickly in this murky situation you find yourself in. Only you can do this. Talking to your wife to find out what DM is thinking, doing, wanting, hoping for is just idle gossip. It will be veiled by your wife's own wants, desires and needs in this situation. Go straight to the source and get it out in the open...with all four of you together at the same time. What is going on is kind of like the children's game "Telephone"...the teacher whispers something to a student, who then whispers it to the next student, and so on. By the time the game is done, what the teacher actually whispered and what the last person comes up with are so very far from one another it is not funny.
I tend to be very open and honest and, hopefully, unassuming, so this situation just sends red flags up for me. Of course this is just my opinion based on a little information provided. I do wish you all the best of luck!