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Also, you can do some type of restore by holding down all the buttons except System (Menu, Trackpad, Trigger and Grip) and plugging the controller into USB on your computer. Of course that won't work if it's a defective System button. Since you've already tried that, I'm going with defective System button.
I did try the reset (holding all the buttons down except the system button) but that didn't help. I agree that it could indeed be a bad system button, in fact that seems like a likely cause. I plan on hitting HTC up when I get home from work. If I can get them to agree, I hope they will get me a new one quickly.