As a side note, you could use the file://// protocol to load images, but it's not recommended.
UNC paths under all versions of NT/XP are referenced using back slashes, but because of the PHP's escape strings you'll need to double them up.
In your case, the following would load the file from your UNC path
file:////\net1\img\image1.jpg
However, this would NOT be portable across a samba share, so thus would not work if you where running from a linux or unix server via a shared UNC path.
Under windows the best way to use the file:// protocol directly is to assign a drive letter to the share, you can do this by clicking on your share name in windows network neighborhood and clicking on 'Map network drive' , you should then select the drive letter you want to assign.
Once you've done this, you can then reference your images as follows:
file://z//img//image1.jpg
replacing the 'z' with whichever drive letter you selected.
This is not just a PHP thing, it's also a problem when doing the same thing in ASP/C# .NET as well.
The image proxy is the most sensible way (and the most OS portable) to do this as shown above, UNC paths however are quite ok once you get used to them, it's the slash differences between OS's that tend to confuse people.
Cheers
Shawty