Well, it sort of works for me on linux. That is: i can enter chars, see the "BACKSPACE!" output when i press backspace and see "WORD:" when i press enter. Ofcourse, since you're interpreting every keystroke yourself it fails to recognize EOF (^D) and a lot of other standard console shortcuts.

If you just want a lowlevel line-reading routine, you're probably better off with something like:

print "> ";
while (<STDIN>) {
   chomp;
   print "WORD: $_\n> ";
}
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Have you tried re-insterting the $|=1 line?

updated: fixed some grammar and spelling mistakes