It's not exactly what Nadav was asking for but I worked on a similar project around the same time as Jayesh and didn't finish mine either
https://github.com/marcusgreen/moodle-qtype_textselect
A couple of weeks ago I was considering reviving my project so I tried installing Jayesh's code and it is neither finished nor near being finished.
I made a few brief notes last time I looked at it
https://github.com/marcusgreen/moodle-qtype_textselect/wiki
With two people attempting to develop such a question type, and Nadav asking about it there is clearly a requirement for such a question. However to take what has been written into a production question type would not be trivial.
Jayesh was doing other things as well at the same time such as the Question Practice module which possibly explains why she did not complete her highlightwords. A good GSOC student should be able to complete such a project over a summer, or as ever a bunch of money paid to the right person (not me).