Megadeth reforms and The System Has Failed is released

In May 2004 Mustaine returned to his newest recordings, intended as a solo effort, but due to outstanding contractual obligations with the band's European label EMI, he was forced to release one more album under the "Megadeth" name.

Mustaine decided to reform the band, and contacted the fan favorite "Rust in Peace line-up" to re-record backing tracks on his latest songs. While drummer Nick Menza initially signed on, Marty Friedman and David Ellefson were both unable to come to an agreement with Mustaine. Menza was dismissed shortly after he began rehearsing with the band again. Mustaine states, "It just didn't work out. We tried for two weeks to get everything to happen, and it just didn't click. Five days before the tour started, I had to send him home." Regarding longtime bassist Ellefson not returning to the band, Mustaine said: "David lied to me in the press, he said that my arm injury was fake, went around town and slandered me. We made him a really good offer (to rejoin the band) and he said no. I mean, if I give you an offer and you don't take it, it means no, right?" The resulting album became the first ever Megadeth recording not to feature Ellefson. Original lead guitarist Chris Poland (from the 'Killing is My Business' and 'Peace Sells' era) was hired by Mustaine to contribute guitar solos to the new album; the first time the two musicians had worked together since Poland's dismissal from the band in the 1980s. Poland opted to serve as a studio musician only, as he wished to remain focused on his own jazz fusion project OHM.

On September 14, 2004 Megadeth released their comeback album, The System Has Failed on Sanctuary Records in the US and EMI in Europe. Heralded as a return to form, Revolver magazine gave the album four stars, calling The System Has Failed "Megadeth's most vengeful, poignant and musically complex offering since Countdown to Extinction." The album debuted on the Billboard 200 chart at #18, and was led by the radio single "Die Dead Enough", which reached #21 on the US Mainstream Rock charts. Mustaine announced that the album would be the band's last, followed by a farewell tour, after which he would focus on a solo career.

Megadeth began the Blackmail the Universe world tour in October 2004, enlisting touring bassist James MacDonough (Iced Earth), and guitarist Glen Drover (Eidolon, King Diamond). While in rehearsal for the tour, drummer Nick Menza parted ways with the band, as he was unable to prepare for the physical demands of a full US tour. He was replaced just five days before the first show by Shawn Drover, brother to new guitarist Glen Drover, and also a member of the Canadian thrash metal band Eidolon. The band toured the US with Exodus, and later in Europe with Diamond Head and Dungeon.

In June 2005, Capitol Records released a greatest hits album to replace the now out of print Capitol Punishment, entitled Greatest Hits: Back to the Start, which featured the new remixed and remastered versions of songs from the first eight albums.