Ok, here is the reply I received from Lantronix describing the "Tunnel" mode I am trying to implement with my Arduino ESP32 based design. I hope this helps describes the issue better. I appreciate any and all the advice, thank you all..
Thank you for contacting Lantronix Technical Support.
There are two modes of operation in Xpico/xPort: Tunnel Connect and Tunnel Accept. The difference between these two modes is the direction of the connection initiation. In Tunnel Accept mode, the connection is initiated by the remote client, while in Tunnel Connect mode, the connection is initiated by the Xpico/xPort device.
In Tunnel Accept mode, the Xpico/xPort device listens for incoming connections from a remote client. Once a connection is established, the device can communicate with the client through the tunnel.
In Tunnel Connect mode, the Xpico/xPort device initiates a connection to a remote server through a tunnel. Once the tunnel is established, the device can communicate with the server as if it were directly connected to it. In Tunnel Connect Mode, Xpico/xPort acts as a TCP Client. The application running on the PC acts as a TCP Server and listens on a particular port number. This can be tested with terminal emulation programs like Hercules Setup Utility, Teraterm, and Putty.
For example, let's assume there's a serial device connected to Xpico/xPort serial port and you want to send data to a PC running Hercules Setup Utility. In order to do that, you would select the Tunnel Connect mode and enter the IP address of the PC where Hercules is running and the port number listening (in our case it's 12345). So whenever the serial device sends data, it sends it to the Hercules Setup Utility. You can run your application instead of Hercules Setup Utility.
Regarding your question about the "Tunnel 1" IP address and port number, they are actually the "Remote" IP address and "Remote" IP Port number of the remote server where Xpico/xPort initiates the connection attempt and sends the data.
By default, Xpico/xPort will assign itself an IP address in the range 169.254.x.x if it does not get an IP address from a DHCP server (router). To find Lantronix device servers, the PC running Device Installer (DI) should have an IP address in the same range as the Xpico/xPort that you are trying to discover.