There is no escaping done ever.. It's just raw data packets. I have been selling the WiModem for the C64 for nearly 2 years and the first I had ever heard about Telnet was about 2 months ago when someone was trying to contact tty.sdf.org:23 and the terminal software just sat there and then hung up. It turns out tty.sdf.org sends a request for the terminal type. Once I supported it, you can log in no problem.
Edit: so I have looked into the Telnet a bit more and it seems that ONLY port 23 is suppose to be handled as a Telnet type connection. That makes sense because the only portals I have seen all have port 23 as their port. Everything else has no Telnet escaping at all.
I guess from the terminal emulator aspect, I've always seen the connections referred to as "Telnet" and long ago when I disabled the telnet mode on Heatwave, I had a number of "complaints" about transfers not working properly. So it seems that there is some escaping happening on ports other than 23, but in those cases it was probably the terminal emulator or a setting in the device people were using (like the UDS) that were creating these scenarios.
I think your Wimodem232 will function just fine once the escaping is done both directions.. However, based on the knowledge you have shared, I am now thinking about changing Heatwave's UDS to use a raw connection, and adding an option to escape 0xFF and support the Telnet ECHO and BINARY options for the clients that require it. I would do the same in my terminal emulator code. I need to do a bit more research and testing, as things are making much more sense now. Thank you.