Bingo! On line 190 of wp-blog-header.php, there is an if statement that checks if there are 0 posts, and if it isn’t a 404 page, or a search… it sets is_404 to true.
By commenting out lines 193-197 I don’t get the 404 anymore. I’m not sure what the implications are though so I’m hoping someone who has been working with wordpress longer than I have (umm…about 4 hours) can tell me why this is bad and what I should do instead.