I have the units set to MM with Alt-U and my gcode is using MM also.  However, when I run the gcode I max out the Z axis on this line.

N150G00G43Z31.750H1

This above line is correct, Z should go to 31.75mm/1.25".  However, in looking at the coordinates in mach3 I can't figure out what units they are in?  I did some rough measurements and see that moving 1" reads about 3.9 in mach3.  This is the reason it is maxing out the Z axis when trying to move to 31.75.  Any ideas what is wrong here?

What are your native units set to, and is there a G20 or G21 in your code?

Yes, there is a G21.

N110G00G21G17G90G40G49G80

What is the height offset for tool 1 in the tool table? It could be that as you are calling it.
Hood

the offset is 0, so that's not the problem. why is it when I zero out an axis, then jog a measured 1", my coordinate says 3.9? that's causing the problem since that Z31.75 is off the table.

You didn't say what your native units are set to?

isn't that with the alt-U or are you talking about the setting that's used for the motor tuning?  it's MM both ways.

Sounds like your steps per unit are set incorrectly, also as Ger says you need to first choose the native units before you do anything with regards steps per unit. You get that from Config menu then Set Native Units. You only ever do that the one time and if wishing to run code with the opposite units from your native units you change that in code with G20 or G21.
Hood

I'll double check the steps per unit but I thought I set it correctly per the specs.  I know i set it to be MM from the start and have not changed it.

steps per unit is set correctly and native units is MM.  is there some other configuration that would affect this?