Hey there - the Context.xml is only needed when you are previewing - it shouldn't be necessary once the form is published to SharePoint. That said, the siteUrl should be to the SharePoint server:
<Context siteUrl="http://54th.kuwait.smt.swa.dss.army.mil"/>
Also, here's a link to a good blog post on setting up the contact selector - don't be put off by IP 2010 in the blog heading, the post applies to 2007.