Yep, a 404 would be expected. Apache in Ubuntu uses /var/www as the document root, so if it is listening on 192.168.0.7 (local network) it will serve the contents of /var/www when you ask it to. It will serve index.html or index.htm if it exists when you request a folder name (e.g. 192.168.0.7 or 192.168.0.7/webuser1). Also it will try and serve index.php etc. if you have PHP or other scripting languages installed and configured.
If /var/www/webuser1 is an empty directory, requesting 192.168.0.7/webuser1 will return a 404 (not found) error. This is because your request translates looking in the /var/www/webuser1/ folder for a file named index.html, index.htm (or index.php etc.). When Apache can't find it, it returns a 404. If you put something like the following in /var/www/webuser1/index.html it should be output when you next surf there.
Code:
<html>
<body>
<p>Hello!</p>
</body>
</html>
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