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From the Program Policies:
* Only one ad unit may be placed on each web page.
* Ads must not be displayed on any domain parking websites, pop-ups, pop-unders, error, registration, or "thank you" pages, or in any email.
* Ads may not be placed on pages published specifically for the purpose of showing ads, whether or not the page content is relevant.
* Elements on a page must not obscure any portion of the ads, and the ad colors must be such that the ad text and URL are visible.
'Error' doesn't appear to be defined anywhere in the FAQ either.
Prohibited Uses. You shall not, and shall not authorize or encourage any third party to: ...(v) display any Ad(s) on any error page, registration or "thank you" page ...
Right from the AdSense terms (bold mine).
By returning a 200-OK status, you may seriously confuse search engines, get into duplicate content issues, etc. And even a custom error page is still an error page under the TOS.
Server response codes - Ref: [w3.org...]
Time to create custom 404s with sensible context (url) sensitive content, and return a 200 instead.
I think that, too, would violate the spirit if not the letter of TOS. It might be reasonable to redirect 404's to an existing page on your site. But anything that functions as an error page -- where users have an unreasonably high chance of clicking on an ad just because they have no other navigational choice -- is bad for advertisers. I'd contact Google before doing any creative error trapping.
There's no excuse - 404 is error - error means "something wrong". I'd look what's wrong and not how to let look wrong like being right.