As an update, I changed the php image selection from blank to file. New media uploads now default to attach to media file. The permalink now links to the media file which is http://mysite/uploads/date/file-name. The permalink is still http://mysite/name. Should not be any more 404 image errors.
Hope this helps someone. It only took me 8 days, a ton of research and a few friendsto figure out.
