The latest version of the Google Toolbar has introduced advanced handling for 404 errors. This involves realising that the page is not going to load, and giving you alternate content in that situation. For a "File not Found" that includes giving you links to alternative places you might want to go:

Other activities include showing you the cached version of the page if the site is down and suggestions for mistyped URLs. All of which are designed to improve the web experience.

As part of our search engine optimization of a site, we always check that File Not Found pages return the correct header status (404), and we try to implement a custom page for the site that (a) looks like the site and (b) gives a lost searcher some options of where to go to. According to the blog entry on Google Webmaster Central, this will still work, it is only the short versions that will be interpreted as in the screenshot above.

It is a nice move to increase usability of the web as a whole, by removing the stumbling block of the dreaded "page not found" message or "site unavailable". It is interesting that if you have correctly implemented a custom error page, it will leave it as it is.

Unfortunately, although it doesn't say specifically, I assume that if your site gives an incorrect 200 header to visitors, that will still be interpreted the same way - without the correct header status the Google Toolbar can't tell it is an error. Google Webmaster Tools already gives you a snippy message when you try to upload the verification file to a site that does this (there is a meta tag alternative), so there is a clear message that they don't like this. Always in SEO it is wise to make a search engine crawler's life easier, and this is an easy fix in most cases, it's just surprising that it is wrong so often when we take a site on.