Reminds me of this. He says, "I won!". I feel a bit like a similar winner here. :p
Anyway, I think the tabIndex approach, with highlighting the entries that match the current search string, is viable. I'd certainly add sentinel tabIndex entries (anchor elements with 1x1-pixel transparent contents) that'd refocus to the search bar. And it all needs a lot of testing on different browsers to see if it works.
It might even be nice to add an autoexpand (can we?) to the select elements, so that tabbing through them opens the drop-down list automagically. That'd save one awkward Alt+cursor keypress in Linux Firefox on the final target select element.
Most importantly, I'd first generate a much, MUCH larger data set example to work on. Probably one much larger than even the typical ones, as those are the cases where this functionality is most needed in practice. And ask for opinions and ideas from other data entry folks. (Their grievances and input is to be taken with a grain of salt, because they are not necessarily using their most efficient work flow tactics.)