i'd go for number 2 and really make your 404 special
put in a 'ooops - you've found this page in error - it's probably our fault because we've moved something. visit the homepage here or search for what you're looking for here'
so link up to the homepage and put in a search option ..
At the moment when people go to a non-existent page they just get a white page with the 404 error. I'd like to create something user-friendly as described above, but I don't know how to do it - is it to do with the htaccess? Could someone explain in simple steps how to do this? Thanks.