SH404 as of version 3.2.0.1108 seems to have a bug where if you are logged in the back end and have done a url search, therefore limiting the url's it shows in the backend, if you then purge your URL's, it won't generate any new URL's meaning every page you click on will be a 404. This has been replicated in Joomla 1.7 only so I can't be sure if its a bug in other Joomla versions.
To fix the issue simply clear your search filter in SH404 in the back end of Joomla. Then purge the URL's again.
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