I think your question about $1 has already been answered above. However I can see some other problems with your regex.

s/\ni ([^\n]*?)\n/makeImageTag(\1)/eg

You are much better off using "^" to anchor the start of a new line. There is no reason to try and handle line delimiting when perl can do this for you. (even if you did want to multi-line match you should be using /m) You can drop the /g as well because if your regex is anchored to the start of the line you can't have multiple matches on the same line anyways.

Cheers,
-Dogma