ages ago there was discussion of this idea on comp.text.tex, and the general conclusion was you can't do it satisfactorily. satisfactory, in my book, involves not making characters active, but i can't see how that could work at all.
personally, i would want to make space active, and have it then look at \spacefactor and \MakeUppercase the following character if the factor is 3000.
something like
\catcode\ \active % latex already has a saved space character -- \space
\def {\ifhmode% \spacefactor is invalid
% (or something) in vertical mode
\ifnum\spacefactor<3000\else% note: with space active,
% even cs-ended lines need %-termination
\expandafter\gobbleandupper\fi}%
\def\gobbleandupper#1{\def\tempa{#1}\def\tempb{ }%
\ifx\tempa\tempb% can''t indent the code, either :-(
% here, we have another space
\expandafter\gobbleandupper% try again
\else\space% insert a "real" space to soak up the
% space factor
\expandafter\MakeUppercase\fi}%
this doesn't really do the job -- there are enough loose ends to knit a fairisle jumper. for example, given that we can't rely on \everypar in latex, how do you uppercase the first letter of a paragraph?
no ... however much it hurts (which is why i avoid unnecessary key operations) we need to type latex "properly" :-(