Time to throw my $0.02 in.
This is an answer to the question, as I understood it, that works, it's quick and dirty, so feel free to make suggestions. This code is untested, but I did create a working fiddle here: http://jsfiddle.net/66RXc/
<html>
<head>
<title>Testing</title>
<script type="text/javascript">
<!--
function call(val) {
document.getElementById('result').value += val.charAt(val.length - 1);
document.getElementById('result').value =
document.getElementById('result').value.substr(0, val.length);
document.getElementById('test').value =
document.getElementById('test').value.replace(/[^\^]/g, ' ');
}
-->
</script>
</head>
<body>
<textarea name="textarea" cols="20" rows="5" id="test"
onKeyUp="call(this.value);"></textarea>
<textarea style="display:block" cols="20" rows="5" id="result" disabled>
</textarea>
</body>
</html>
The way I approached it was every time a character is typed in textarea "test", copy it over to a hidden text box, and replace all the characters in "test" except ^ with spaces. The characters are hidden, and the carat is still there. The full text is still in the other box. You could use display:hidden instead of display:block to hide it.
This isn't exactly the best implementation in the world, just something I did quickly. You have to type kind of slow (~15-20 WPM) for it to work.