This should help explain what is going on, I added some code (xxxxxxxxx) to show the tool lifts
N5 G17 G20 G40 G80 G90
N10 M1
N15 M06 T1
N20 M03 S90
N25 G00 X1.0 Y2.0 G54 E1
Rapid X,Y to position, apply offset E1 (probably 0)
N30 G00 Z1.0 G43 H01
This line should not move the tool, but rather should apply the tool height offset to the DRO.
N35 G00 Z.1
Rapid Z down to 0.100 above part
N40 G01 Z-.002 F3.0
Move at plunge speed to -0.002
N45 G03 X3.0 Y2.0 I1.0 J0.0
Arc move CCW with an incremental radius of 1.0, end arc at X,Y position. Arc starts at position in N25
N50 G01 Y6.0
Move to Y
(N51 G00 Z0.100)
Lift tool
N55 X1.75
Move to X
(N56 G01 Z-G.002)
Tool down
N60 X4.25
Move to X
(N61 G00 Z0.100)
Lift tool, end of ''J''
N65 G00 X4.75 Y6.0 G54 E1
Move to start of ''L'', top
N70 G01 Z-.002 F3.0
Tool Down
The code below here needs some attention, you are showing incremental moves, but you are in absolute mode (G90)
N75 Y-6.0
N80 X6.5
N85 G00 X7.25 Y2.0 G54 E1
N86 G01 Z-.002 F3.0
N90 G03 X9.5 Y2.0 I1.0 J0.0
N95 G03 X8.25 Y3.5 I-1.0 J1.5
N100 G02 X7.25 Y4.75 I-1.0 J1.25
N105 G02 X10 Y4.75 I1.25 J0.0
N110 G00 Z1.0
N115 M05
N120 G28
N125 M30
(all done, enjoy your broken sharpie)