Your code was not too bad to start with but you are turning on comp with a move in the wrong direction. Try this.
G0T0404(TURNING TOOL)
G96S650M03
G0X1.145Z0.
G1X-0.05F.004M08
G0X1.125 Z0.1 (*********)
G71U.06R.02
G71P101Q201U.01W0F.006
N101G0X0 (*********)
Z.05 (*******)
G01G42Z0F.003 (********)
G03 X0.7071 Z-0.8536 R0.5
G01 X1.125
N201G0G40Z0.05
G70P101Q201
G80M09