This week's book giveaway is in the OO, Patterns, UML and Refactoring forum. We're giving away four copies of Refactoring for Software Design Smells: Managing Technical Debt and have Girish Suryanarayana, Ganesh Samarthyam & Tushar Sharma on-line! See this thread for details.
What's the issue? The wars are being unpacked into a folder structure. This is the normal default behavior.
There is a setting (not sure which off the top of my head) to have Tomcat simply run the app out of the war without "exploding" it, if that's what you want. Look through the Tomcat docs for configuration and you should find it.
You should NOT put your context definitions in the server.xml file. That behaviour has been discouraged since Tomcat4 first came out. Put each context definition in its own file with an ".xml" suffix and place the files in the TOMCAT_HOME/conf/Catalina/localhost directory. Note that the context name that the app will be deployed under will be taken from the context filename (minus the ".xml" part, and not from the name in the Context element itself