Same exact thing started on my original droid ~3 days ago.
- Home and Search buttons do nothing in virtually all apps, but are working mechanically.
- Camera Button doesn't bring up the camera, but works to take pictures.
- All options except Power Off disappeared from power button menu.
- Screen unlock pattern gone and can't be re-initiated.
- Phone doesn't ring but goes to voicemail.
There's clearly some bug in an update somewhere that I've been able to avoid until now. I have all app updates on manual, and am running Android 2.2.3 from Nov 2011. That only thing I can think of that may have triggered it was I activated a Live Wallpaper.
Would sure be nice to have this figured out so we don't have to do a factory reset every time somebody catches it.