how to deal with sloped tile flange in tub

The previous owners did a "home job" tiling the bath/shower. They used 1x1" tiles, but left a 1/2" gap at the tub line that they filled with grout. The grout cracked, and I have water damage in the wall. I am planning on cutting out the lower section of wall (up to a row of 4x4" tile), putting in cement backer board, and then re tiling with 4x4" tiles.
The question I have is regarding the tile flange. On the ends of the tub, the tile wall comes down flush to the tub. On the back (long) wall, however, it looks like it is sitting above the sloped flange (this is a cast iron tub, by the way). I have been reading that the backerboard should overlap the flange. The problem is, I don't want to replace the whole wall (as it is tiled to about 11' with tile that goes all the way around the room). If I try to overlap the flange, I will either have to bring the wall out, creating a lip in the middle of the wall, or slope it or something.
Any advice on what to do? Any idea why they would not bring the wall out over this one edge? The only thing I can think of is that they used a thinner material for backerboard.

See attached pic.

Thanks,
~john

Do you know if there is any vapor barrier behind the wall? CBU (cement backer unit) is NOT waterproof, but it is a good backer for installing tile. You could have more problems behind that wall. Is the tub also used as a shower? If not, then that isn't as critical. Terry's site is great for plumbing, but I think you get better info on tiling over at his friend's www.johnbridge.com

Glazed tile is fairly waterproof, but the grout isn't, and water will penetrate that too. Thus, without a vapor barier behind the wall, the structure could be rotting. Note, the tile council of America recommends caulk between changes of plane or changes in materials, so, the joint between the tile and the tub should have been caulked.

Is there any way you can look - maybe poke a hole in the wall in an adjoining room to take a look around inside. That may help you determine what the wall is made of and it's state; much easier to repair that than the tileed wall. It may help you decide what really needs to be done.

I have no idea what is behind the wall except to know that I have water bubbles in the paint on the exterior wall (meaning that water has soaked all the way through the wall).

Thanks for the referral to johnbridge.com. I pasted this thread to that formum (http://johnbridge.com/vbulletin/showthread.php?t=23621).