If an image is not found on the server.. say my website is sourcing an image such as <img src="images/blue.jpg" /> but blue isnt there, can it call a file like images/404.jpg automatically and display that in its place? I've scoured google.. cant find anything on custom image 404's.
Afaik, you cannot specify a '404 image' as such. You could setup mod_rewrite to rewrite requests for non-existant images to your 404 jpg. If you do go with this option, you may also need to use a gif and png version as well and send the appropriate one depending on the type of image requested. In theory, the headers should sort out the content-type regardless of the original filename, but a browser may run into difficulties if it's expecting a GIF and gets given a JPG. But, and I don't know what your website is, generally speaking a non-existant image would be requested very infrequently compared to your 'real images'. As a result, making your server have to compare if the requested filename was an image and check it exists on every request (i.e. every time an image, file, page, css is loaded) would be a bit inefficient. I would suggest setting your 404 error document to a script, and have the script output your 404.jpg if the request was for an image or otherwise show a normal 404 page.
Thius cannot be done directly by placing 404 error image. There are various 404 scripts available which allow you to do this depending on the type of page requested as rodney88 said.