However, I can not get it to generate the format file:
luatools --generate luatools --ini --compile --verbose cont-en This is luaTeX, Version 3.141592-beta-0.10.2-2007090506 (Web2C 7.5.6) I can't find the format file `luatex.fmt'!
What am I missing here?
Obviously this command line (which looks quite strange to me) does not compile the format; it tries to run ConTeXt Mark IV directly. It seems that you have concatenated two legitimate command lines ;-) Try: luatools --generate luatools --ini --compile --verbose cont-en
Do I need to set some environment variables for lua? Or for ConTeXT?
Yes, quite a bit, for ConTeXt above all; as a minimum, TEXMFCNF and TEXMF. Otherwise you can have a look at Hans' setuptex in the minimal distributions: linuxtex.zip, macosxtex.zip, etc. setuptex is a shell script, so all you have to do is source it (and forget about the other executables in the zip file since you can't use them anyway). Arthur