The interpretation that I like, and havent had problems with inspectors/engineers arguing with, is that if buildup is more than 1/8", it is not considered "flush" anymore, so it is rejectable. I think that "flush" is the ideal, and 1/8" is the buildup tolerence. Also, the 1/32" undercut only applies to the depth, not the length or width. You could have undercut along the whole length of of the weld, and as long as it is less than 1/32", the welder technically passes. It doesn't say much for their technique though. The one part of your question I have never really worked out in my head either, is how does the undercut rule apply to adjacent weld beads? The statement in 4.8.1 (3) refers to the weld metal/base metal interface, not adjacent weld beads neccessarily. It would make sense if it applied to undercut on adjacent weld beads, as the intent is to avoid the notch effect created by undercut, which is just as applicable in the weld as in the adjacent base metal. However, it is not spelled out that way as far as I have seen.
G Roberts