There are two ways a moderator can act on a "rude or abusive" flag that they disagree with:
- explicitly decline the flag, and
- clear the flag from the post.
They both have the effect of removing all "rude or abusive" flags from the post, and undoing the automatic downvote associated with each. But while former obviously declines the flag, the latter only disputes it. (When a flag is declined you'll additionally get a note about this in your flagging history.)
(The above also holds for "spam" flags.)
In Stack Exchange nomenclature having a flag disputed flag is not as strong as having it declined. In fact there are some automatic mechanisms which dispute flags. For example, any edit to a post will dispute all "very low quality" flags on it. I do not think there are any negative effects to having flags disputed, whereas having too many declined flags may lead to a temporary flagging ban.
Putting this all together, the flag was disputed because a moderator didn't think that the post warranted a "rude or abusive" flag, and decided to not outright decline it.
That being said, I don't believe that the "rude or offensive" flag was warranted on the post you flagged. Sure a "bad word" could be read off of it, but the post itself could have been simply edited (or an edit suggested) to remove this possibility without damaging the post at all. In general I feel that the "rude or abusive" flags should be reserved for posts whose entire intent appears to be being rude or abusive. These flags are really intended to stop the user from posting more, and at a minimum come with pretty hefty penalties (-100 reputation if enough such flags are raised on a post).
In cases where a post has perhaps objectionable content but is otherwise meaningful, the objectionable content can usually be edited out without harming the mathematical intent of the post. (If the post author and others get into an "edit war" over the objectionable content, a flag will automatically be raised to summon site moderators to the post.) In other cases a moderator-only "other" flag could be raised, or even pop in to the Math Mods' Office chat room.