Looking only at the external links, since you will naturally fix the internal ones:

How many different pages are involved in the bad external links? And how many different sources? Too many for you to contact the individual webmasters and say "It's awfully nice of you to link to my site, but we'll both be happier if you update"? That's assuming for the sake of discussion that the links are coming from places you want, or at least don't mind being linked from.

Do you know whether the bad links involve pages that used to exist and no longer do? Can you identify certain address formats, directories etc that would fit this pattern? In general you are better off calling them 410 instead of 404. But it's Not Nice to stick a 410 label on an URL that you know perfectly well never existed.

Who, if anyone, is actually arriving via those bad links? If there's a significant number of humans, you might send them to a custom 404 page made just for outside arrivals, pointing them to likely places. The mini-sitemap approach. Some sites send all 404s and/or 403s to the home page. (As a user, I can't stand this. But it's done.)

If it's primarily robots, it becomes a judgment call. Do you want a cluttered htaccess, or would you rather have the occasional 404 cropping up in the logs?

thanks for the reply. its looking like alot of different sources, including many internal. definitely not feasible to contact these various outside sources and ask them to update.

from what i can gather, there was some sort of data loss late last year that caused a bunch of these pages to not be restored thus making all these links to those pages 404. for whatever reason, someone decided it was a great idea to 301 these bad pages to another page. how they came about doing multi level 301's is beyond my understanding (that person no longer works for the company). so, yes, they did exist at one time.

i would think that mostly robots are using the links, which in my mind is just bad seo for it to 301 to 301 to 404.

as for my overall preference, i'd like the links to point to a related or semi-related page to at least maintain some value. my concern is going to be the outside links hitting a 404 and then having to track down the original url, which might not already be included in the current 301 loop and send those to a related page.

nobody is even sure of how many pages were lost during their data loss and i'm walking in here fresh looking at this big mess guessing at what may or may not have happened.

A Xenu Linksleuth scan may well be educational.

Multi-step redirect chains are bad news. Fix as many as you can.

Fixing requests for URLs which would otherwise return 404, by redirecting them to some other content page is "usually" a good idea.

welcome to WebmasterWorld, Greek!

i would run a Xenu scan as g1smd suggested.
i would also be studying your server access logs, your GWT console, etc.
you should probably look into some of the inbound link discovery tools as well.
fix all internal links so that there are no redirects or 404/410's.
all inbound links should get a new/resurrected page if appropriate or a single 301 redirect to the relevant existing content or a 410 Gone status code response.