Graham,
The Upper bores, are cut by the Undercut tool as well, remember it is STILL and end mill, just modified. When It plunges in for the larger bores (On my machine it plunges slowly). It contacts only about 1/2 the bottom of the End mill, once it reaches the bottom of that level, it then, moves in the Square path.
I hope that clears it up for you, I tried my hand at posting up a Simulation, AND a Simulation "Tool Path" from my CAM Program. BUT, I cannot figure out how to use the Wencouder (MS movie screen capture utility), to capture my Paths to show you.
If you are worried, cut your self a 0.75" Diameter End mill as described, and put yourself a 2" cube of "Insulating sheet foam", (you can get these foam sheets from home depot), or what ever kinda foam you want. Cut it on foam so you can see what I am talking about.
Scott