Econsultancy have just posted this article on 404 best practices.
Here's the first tip:
Set up your 404
"The worst way to let your users know that they've landed on a page that doesn't exist is usually to display the default message your web server will spit out if you haven't set up your own 404, or to show them a white screen of death."
Read the rest of the article on the Econsultancy website.