Never used one of these machines, almost all the programming I've done is on machines that use G-Code. It looks like you're not informing the machine that the circular paths you are giving it are not on the X-Y plane. So, when presented with Z values in the definition of circles, it instead just does a linear motion from point to point in your path, instead of the arc you desire.
One would hope that a good post-processor would handle generation of the necessary instructions to switch from an X-Y plane for arcs to the X-Z plane, then back to X-Y when done, but it doesn't look like the one you have is doing that.
Do you have any example programs that cut an arc in a non X-Y plane? Is there a simple switch that selects between the planes, like G17 and G18 in G-Code?
No surprise that points only worked, but as you might notice, that type of path is highly dependent on your settings for tolerance - if your tolerance is too big a value, noticeable faceting occurs, etc.
Maybe someone with specific Heidenhain experience can jump in and help. You might also consider going on a quest through the old discussions here to see if any other folks with that type of controller have discussed post-processors and which are best.
