I never did understand why Google decided to allow AdSense on 404 pages. Well, that's not entirely true.
In some instances, a person could actually be looking for information on a specific topic, land on a page that doesn't exist, and click out to another website that does through AdSense. But, in most cases, the site owner really doesn't want the user to leave the site (at least, I generally don't), and provides suggestions for the user.
Plus, the information 404 pages tend to be generic - sorry, couldn't find what you're looking for - text. How does that help advertisers using AdWords?
Ah, oh well, I'm just thinking out loud and rambling now...
~ Teli
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