When Dynamic Highlighting is selected the PHP code is suppose to be highlighted. Briefly it worked as advertised with one file. The other files grayed out the PHP code, leaving HTML code highlighted. Now Dynamic Highlighting grays out all PHP code on all files.

Any idea as to why and how to get Dynamic Hightlighting to highlight only the PHP code?

The dynamic highlighting means it will only highlight the section of source the cursor is positioned in.
So if the cursor is in the PHP section it will hightlight php and gray out the rest. Move it to javascript to highlight that and gray out HTML etc... Try it

Thanks.

It's a 'duh' moment.