Fun programming puzzler

 Python (95 characters)

Code:

def f(s):
    n = ''
    while s:
        a = s[0]
        r = s.lstrip(a)
        n += str(len(s)-len(r)) + a
        s = r
    return n

s = '1'
while 1:
    print s
    s = f(s)

 Extra credit (138 characters)

Code:

def f(s):
    n = ''
    while s:
        a = s[0]
        r = s.lstrip(a)
        n += str(len(s)-len(r)) + a
        s = r
    return n

import sys
try:
    s = sys.argv[1]
except IndexError:
    s = '1'
    
while 1:
    print s
    s = f(s)

Not the cleanest or most time-efficient method, but character-efficient, which is what Fiel asked for.

Edit: Didn't realize "input is always valid", so you can get rid of the try/except block in the extra credit, which drops it down to 116 characters.

Edit: Comparing s to the empty string wasted 4 characters. Whoops.