• Highlight all words that match the set of target terms.
• Print all occurrences of matching words along with some preceding and following words

... this is a sequence that has target1 as well as target2, where target2 occurs twice in a short span ...

Try the sub this way (not tested):

sub findtext
{
    my ($files, $terms) = @_;
    my @filenames;
    for my $arg ( @$files ) {
        push @filenames, grep /\w/, split( /\W+/, $arg );
    }
    my %target;
    $target{$_} = undef for @$terms;

    local $/ = undef;  # this only applies within the sub

    for my $file ( @filenames )
    {
        unless ( open( FILE, "/home/jroberts/$file.txt" )) {
            warn "open failed on $file: $!";
            next;
        }
        $_ = <FILE>;  # read full text;
        close FILE;

        my @words = split;  # @words has all words in $file
        for ( @words ) {
            s{(.*)}{<B>$1</B>} if ( exists( $target{$_} ));
        }

        # all target words in $file are now marked, so
        # print the sequences that contain marked words

        my $printing = 0;
        for my $i ( 0 .. $#words )
        {
            if ( $words[$i] =~ /<B>/ ) {
                if ( $i and $printing == 0 ) {   # backtrack for prior
+ context
                    my $j = ( $i >= 6 ) ? $i - 6 : 0;
                    print join " ", @words[$j..$i-1];
                }
                print $word[$i]; # (update: have to print this every t
+ime)
                $printing = 6;  # number of following words to print
            }
            elsif ( $printing ) {
                print $words[$i];
                $printing--;
                print "\n<br/>\n" if ( $printing == 0 );
            }
        }
    }
}
[download]

This doesn't work. It doesn't appear to substitute the bold in and I don't know why. I've tried tr with the same result. Anyone know what's wrong?

Have you ever heard of running perl in "debug" mode? It's really cool, and if you haven't tried it, you're missing a lot. Check out "perldoc perldebug", then run your script with

  perl -d name_of_script [command line args for @ARGV]
[download]

While the debugger is running your script, you can type "h" to get a brief summary of debugging commands; use "b findtext" to set a breakpoint in the sub, so whenever the execution enters that function, it stops to let you decide what to do next. At that point, you can step through a line at a time, set additional breakpoints, inspect current values of variables, and so on.

Since you have not posted the surrounding code that is calling the findtext sub, you're on your own. (I did say the code was not tested...) Post another reply if/when you get some firm, clear evidence about a specific problem, after trying a couple diagnoses and solutions on your own, in case you still can't figure it out at that point.