Hi stewnsteve,
The way I read AWS D1.3:98, Paragraph 6.1.1.3 is that the "depth of undercut is not a subject of inspection and need not be measured" (with a v-wac gage). It goes on to say, "melt-through that results in a hole is unacceptable".
I would say that as long as the length doesn't violate the L/8 and there are no melt-throughs that result in holes, any undercut within those parameters is acceptable.
John Wright