The newline chars in the file should be encrypted/decrypted with everything else. Using the >= operator instead of > is probably a good idea, as whilst doing a little "print debugging" I found that there was a NULL or something at the end of the $key variable. That didn't seem to fix it, but oddly enough I seem to get much better results when I use the following loop:

while(my $char = getc(IN)) {
    if($kp >= length($key)) {
    $kp = 0;
    }
    
    my $kc = substr($key, $kp++, 0);
    $char ^= $kc;
    print OUT $char;
}
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That encrypts/decrypts perfectly, but seems to end abruptly after running through 1k of data. Now I'm even more confused. What's the difference between this code and the code I posted before?