You made a classic mistake there: $1 stays set until the next successful match, not until the next regexp invocation.

My take on the whole problem would be slightly more verbose:

open BIGFILE, $filename or die "Could not open $filename:$!\n";
while (<BIGFILE>) {
  unless (defined($smallfile)) {
    $smallfile=$_;
    chomp $smallfile;
    open(SMALLFILE,">$smallfile") or die "Could not open smallfile $sm
+allfile (referenced in $.): $!\n";
  } elsif (/^\$$/) {
    close(SMALLFILE) || die "Could not close $smallfile:$!\n";
    $smallfile=undef;
  } else {
    print SMALLFILE;
  }
}
close BIGFILE;
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Update: $filename should contain the name of the BIG file, of course.