Here's an update:
On the Database Server I tried to install Lansweeper Database as SQL Auth again, said connection failed. So I went into SQL Management Studio Express 2005, and created a test user "lstest". I then logged into SQL Management Studio Express with that user successfully using SQL Auth. So I tried something else. I tried to install Lansweeper Database using this username, I put the user, then the password and confirmed it and then it said that connection succeeded! Then I proceeded through and got a lot of errors during install, saying could not create database, and then errors that could not connect to database. Since the DB was dropped this user's default DB was set to "master" and I figured it was some kind issue with the account setup. So I got to thinking... Windows Auth install works, why cant I *install* that way, and then just create a seperate SQL Auth user? So that's what I did. Successfully installed Lansweeper Database and Website on the Database server with Windows Auth. The Website connects fine. I created a new user "lansweeper", set to SQL Auth. Set a password, and made sure everything about the user looked the same as lssqluser31. (Database, schema, etc.) I then crossed my fingers, went to the server on the other side of the tunnel, started Install and it failed right away again...
But this got me thinking... The Service installer is Not asking if I want to install via Windows or SQL Auth. So how could it even know I have SQL Auth setup? So I wanted to test that there are no firewall or other issues with the IPSec tunnel...
I can telnet to "MONITORING" port 1938 fine.
SQL Management Studio Express 2005 is already installed. So, I started it, put "MONITORING\SQLEXPRESS" manually in even though it couldn't find it on it's own (even in Network tab). I chose SQL Auth. I put in username "lansweeper" and the password I set and Voila! I got into the DB in this manner.
How is the Service Installer checking connection to server before asking if it is Windows or SQL auth? Is it looking on the wrong port? I tried "MONITORING\SQLEXPRESS, 1938" in Lansweeper Service installer, but that didnt work either.
Thanks!