Swanson - 11:13 pm on Dec 15, 2011 (gmt 0)
snickles121, yes - that is it and why I got confused about the issue.
I was also mis-using the terminology - I was using "soft" as a replacement for "custom". I didn't realise the definition of a soft 404 returned a 200 - which to me is not a 404 at all. You learn something everyday!
A custom 404 should never return a 200 HTTP response code - yes you get all the problems that g1smd mentioned (he is the expert on these issues I have seen over the past few years).
However you shouldn't get a 200 response code on the invalid URLs - yes you will if you test headers on the actual 404 custom page as it is valid.