How do I process each word on each line?

Use the split function:

    while (<>) {
	foreach $word ( split ) { 
	    # do something with $word here
	} 
    }

Note that this isn't really a word in the English sense; it's just chunks of consecutive non-whitespace characters.

To work with only alphanumeric sequences (including underscores), you might consider

    while (<>) {
	foreach $word (m/(\w+)/g) {
	    # do something with $word here
	}
    }

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