Wordsearch Solver

Perl - 230 chars

Count includes 4 for "-ln " command-line options.

if(1../^$/){push@w,$_,''.reverse if$_}else{$a.="$_\n"}END{$_=$a;/.+/;$W=$+[0];y/A-Z/ /;chomp;for$w(@w){for$n(0,$W-1..$W+1){$r=join".{$n}",map"($_)",(@l=split//,$w);if($i=$a=~/$r/s){substr($_,$-[$i++],1,shift@l)while@l}}}print}

Ungolfed:

# -n: implicitly loop over input lines
# -l: strip the newlines
if ( 1 .. /^$/ ) {              # from first line to empty line
  push @w,                      # record in @w
    $_,                         #   the word
      ''.reverse                #   and its reverse
        if $_                   #   if it's not the empty line
}
else {
  $a .= "$_\n"                  # otherwise, add to the search array
}

END {
  $_ = $a;                      # make a copy for the output
  /.+/; $W = $+[0];             # compute array width
  y/A-Z/ /;                     # blank the output board
  chomp;                        # and remove the trailing newline,
                                #  because -l will add it back for us
  for $w (@w) {                 # for each word
    for $n (0, $W-1 .. $W+1) {  # for each direction in E, SW, S, SE
      $r = join ".{$n}",        # form a regexp with an appropriate
                                #  number of characters skipped between letters
                                #  (0 -> adjacent, so E; $W -> next line, so S;
                                #   off by one from $W for the diagonals),
        map "($_)",             #  capturing the letters of the word (for their offsets),
          (@l=split//,$w);      #  which we split up here
      if ( $i = $a =~ /$r/s ) { # if the word matches in this orientation
        substr( $_,             # set the substring of the output
                $-[$i++],       #  at the offset this letter matched
                1,              #  length 1
                shift @l )      #  to the corresponding letter
          while @l              #  (for each letter)
      }
    }
  }
  print                         # and print the output
}

JavaScript: 342 characters

Code-Golfed version:

function a(b){c='\n';d=b.split(c+c);e=d[1].split(c);for(f=-1,g=[];h=e[++f];)for(i=-1,g[f]=[];h[++i];)for(j=-2,g[f][i]=' ';2>++j;)for(l=-2;2>++l;)for(k=0;m=d[0].split(c)[k++];)for(n=-1;o=m[++n];)for(p=f-n*j-j,q=i-n*l-l,r=0;(s=m[r++])&&(t=e[p+=j])&&(u=t[q+=l])&&s==u;)if(r==m.length)g[f][i]=o;for(i=0;v=g[i];)g[i++]=v.join('');return g.join(c)}

Formatted version:

function solveWordsearch(input){
    var lineBreak = '\n';
    var solver = input.split(lineBreak+lineBreak);
    var board = solver[1].split(lineBreak);

    for(row=-1,output=[]; line=board[++row];){
        for(col=-1,output[row]=[]; line[++col];){
            for(rowIncrement=-2,output[row][col]=' ';2>++rowIncrement;){
                for(colIncrement=-2;2>++colIncrement;){
                    for(k=0; word=solver[0].split(lineBreak)[k++];){
                        for(charPosition=-1; wordChar=word[++charPosition];){
                            var startRowIndex=row-charPosition*rowIncrement-rowIncrement;
                            var startColIndex=col-charPosition*colIncrement-colIncrement;
                            for(wordIndex=0;(compareWordChar=word[wordIndex++])&&(compareBoardRow=board[startRowIndex+=rowIncrement])&&(compareBoardChar=compareBoardRow[startColIndex+=colIncrement])&&compareWordChar==compareBoardChar;){
                                if(wordIndex == word.length){
                                    output[row][col]=wordChar;
                                }
                            }
                        }
                    }
                }
            }
        }
    }

    for(i=0;outLine=output[i];){
        output[i++]=outLine.join('');
    }

    return output.join('\n');
}

The concept behind this solution is to iterate over all positions on the board, initialize a 2D-array's values to ' ' for each position, and then consider all potential word directions and word offsets. If a matching word is found, the array's value for that position is updated to the correct letter. Finally, the array is converted to a string and returned.

Ruby 1.9, 214 210 206 182 177 173 172 166

s,G=$<.read.split$/*2
O=G.tr'^
',' '
(s+$/+s.reverse).split.map{|w|[0,l=G=~/$/,l+1,l-1].map{|d|(k=G=~/#{[*w.chars].*?.*d}/m)&&w.size.times{|i|O[k+d*i+i]=w[i]}}}
$><<O