2. The regular expresion will replace incidences of the word or phrase with the word or phrase wrapped in span tags which will allow you to colour the text. So:
Pat Richard
becomes:
<span class="highlight">Pat Richard</span>
3. This is a simple example to get you going and you can expand it by separating out the words (using explode() for example) and running them all through the highlighting script.
--------------------------
Relevant threads:
Look what I did! - Slime's announcement of his JavaScript solution.