I have an example using DHTML Menu to target an iFrame on the Unofficial DHTML Menu Resource Site
(Advanced Techniques > Using DHTMLMenu To Target An iFrame). Although the menu is set up to highlight the current item, it doesn't seem to work with the iFrame. I'm not convinced that using iFrames is the best way to develop a site; however, if you're sold on the idea of building a site using iFrames, I'm not sure that the lack of auto highlighting is sufficient reason to abandon the idea.
BillUnofficial DHTML Menu Resource Site