An infinite product is an expression of the form Pi_{n=1}^{infty}a_{n}=a_{1}*a_{2}*a_{3}* * * (the capital "pi" represents "product" and is analogous to a capital "sigma" for summation notation). Such a product is said to converge if the sequence of partial products, defined by p_{n}=a_{1}*a_{2}*a_{3}*...*a_{n}, converges.
For example, if a_{n}=e^(1/2^{n}), then p_{n}=e^(1/2) * e^(1/4) * e^(1/8) * * * e^(1/2^{n})=e^{1/2+1/4+1/8+ * * * + 1/2^(n)}=e^{1-1/2^(n)} (look up facts about geometric series to see where this last equality comes from ).
Since p_{n}->e as n->infty, the corresponding infinite product converges and we can write Pi_{n=1}^{infty}e^(1/2^{n})=e.
If we therefore interpret 1^{infty} as an infinite product 1*1*1*1* * *, then p_{n}=1 for all n and it makes sense to say 1^{infty}=1.
In most other situations, the expression 1^{infty} arises when considering a function of the form h(x)=f(x)^(g(x)), where, as x approaches some "value" (like zero or infinity), the value of f(x) is getting closer and closer to 1 while the value of g(x) is approaching infty (it's getting "arbitrarily large"). This is one example of an "indeterminate form " in mathematics.
In Calculus, a technique called L'Hopital's Rule is often used to try to evaluate what the value of h(x) is approaching as x gets closer and closer to the relevant value. In the present situation, it is also helpful to take the natural logarithm of both sides of the equation h(x)=f(x)^(g(x)) to get ln(h(x))=g(x)ln(f(x)) (after using a property of logarithms). This is then typically rewritten in the form ln(h(x))=(ln(f(x)))/(1/g(x)) before L'Hopital's Rule is used.
If, for example, ln(h(x))=(ln(f(x)))/(1/g(x)) gets closer and closer to 1 as x gets closer and closer to 0, it follows that h(x) itself is getting closer and closer to e^{1}=e as x gets closer and closer to zero.
This is similar to what is happening in Jim's example. If we modify the original function to be h(x)=(1+x)^(1/x) and let x->0 (rather than x->infty). Here, f(x)=1+x and g(x)=1/x. It follows that ln(h(x))=(ln(1+x))/x and you can see from the graph of (ln(1+x))/x below that it is approaching 1 as x gets closer and closer to zero. Therefore, h(x)=(1+x)^(1/x) gets closer and closer to e as x gets closer and closer to zero. The graph of h(x) is shown even further below.
graph{ln(1+x)/x [-5, 5, -2.5, 2.5]}
graph{(1+x)^(1/x) [-10, 10, -5, 5]}