I don't know if it's just me, but entities in my levels only dynamicaly react to light in REALTIME if they were created with script.
For example,
action light_torch
{
my.light = on;
my.light_range = 10000;
}
ent_create("somthing.mdl",null,light_torch);
If you created a light using script like ^ above, any .mdl and .hmp entities should react to the lights color, direction, and range.
Somebody correct me if they experiance different, but when I use lights that are placed in the level using WED, even if I click "DYNAMIC", it still acts like a regular static light.
BTW, I only have the A6 version, I don't know if A7 would treat the DYNAMIC flag properly.