Note: Although this was written for D6 Panels, Panels continues to include contexts. I haven't tested the recent versions of Panels to see if anything has changed regarding contexts but perhaps this will provide a quick review before you get started.
There is a Drupal module called Panels. There is a Drupal module called Context. There is a feature in Panels called context. Panel's context and the Context module are not the same, not even close. According to Earl Miles, the developer of Panels: "In Panels, context is lingo for a wrapper around any significant object. By default, Panels supports 'Node', 'Taxonomy term', 'Taxonomy vocabulary', and 'User' as contexts." But what does that mean?
I recently purchased "Drupal 6 Panels Cookbook" from Packt Publishing, hoping to get all my context/relationships questions answered. I did learn a couple things from the book so it wasn't money wasted but it didn't answer all my questions. So I did what I often have to do, I starting clicking and observing what happens. This article is what I have figured out. I hope you find this useful.