Hi,
This sounds a little like a bad wiring problem between the transfer switch and the generator. But before I leap to any unfounded conclusions let's make sure I understand just which Guardian generator and transfer switch you have. The generator I think you have is an air conditioner sized box that has a 2 cyl air cooled Generac GT990 engine in it. The control panel has a 15 amp fuse, and maybe a 7 amp one, some LED indicators, a 3 position rocker switch (manual,off,auto), and a momentary set exercise switch. If you look inside your transfer switch there is the transfer mechanism, a single relay, either 2 or 4 fuses, and a terminal board where 4 small control wires connect to the generator. The control wires will be labeled N1, N2, 193, and 23.
If all of that is true then I'll also assume that the generator is blinking all of the LEDs and as soon as you put the rocker switch in the manual position the generator starts and the transfer switch moves to the "generator" position. It shouldn't do that, manual means switch the switch manually too. :-)

Let's take care of the exercise setting first. Switch the main output breaker of the generator to the "off" position, this prevents the transfer switch from activating even if the generator runs. Next put the generators rocker switch into the "Auto" position and wait at least 1 minute, if the generator starts we have to fix the wiring between the N1 and N2 terminals in the transfer switch and the matching terminals in the generator before we can proceede. If luck was with us and the generator is just blinking its LEDs at you, press and hold the set exercise switch for 30 seconds, you're reseting a "watchdog" type circut so it has to be for the whole 30 seconds. When you let go of the set exercise switch the LEDs should blink another 10 times or so, then the generator should start and run its exercise for 12 minutes more or less and then it'll shut down. At that time the only LED that should be lit is the green "system ready" one and it should be steadily lit. Remember to close the output breaker again.

Next let's address the transfer switch issue. If I've understood you correctly, the transfer switch moves anytime you turn the generator on. The only reason a regular old RTS type transfer switch could do this is that it's being commanded to transfer. It works like this, the 2 coils that move the transfer mechanism get powered by the source we're trying to switch to, once the switch gets into the position it's going a pair of limit switches disconnect it from the power supply so that the coil is only "live" during a transition. Spring loaded contacts hold the switch in either position once it's more than halfway towards either one. The relay inside the box is also in line with the limit switches so that if the relay is deenergised the switch will try to get to the utility position and stay there, it can't if there is no utility power to drive the transfer coil. On the other hand if the relay is energised, the switch will try to get to the generator position and stay there, if there is no power from the generator it can't because the generator is what drives that bottom transfer coil. So I think that for whatever reason the relay in your transfer switch is staying energized when we don't want it to be.
On the terminal board inside the transfer switch you should see terminals labeled 194 and 23, these are the power to the relay coil (194), and the ground to transfer signal (23). With the generator set to off, and a fairly quiet room, disconnect the wire from terminal 23, if you can hear the relay coil click on and off when you touch the wire to terminal 23 there is something wrong with the wiring at the generator end of things. You should also see 12 volts DC between terminal 194 and ground, this comes from the generator too.

If the relay didn't click back and forth above check it by using a short piece of wire to connect terminal 23 to ground, if the relay isn't energised when terminal 23 is grounded and deenergized when terminal 23 is open you either have a bad relay or a problem in the grounding of your system. To get a bad relay fixed for free call up Guardian, register the generator (you'll need proof of purchase), and get them to tell you where your nearest warrenty service person is. If you tell him about this post he'll bring a relay with him when he comes to you.

If you're satisfied that the relay in the switch is working properly, we're on the trail of a wiring problem at the generator end of things. If the generator has just been installed you should carefully check that wire 23 hasn't been connected to terminal 0 at the generator terminal block. It's easy to get this connection wrong when doing th e install. The other thing that can go wrong is that the wire can get pinched inside the conduit and short to ground. To check this disconnect both ends of wire 23 and measure between either one and ground, you should get nearly infinite resistance.

If you've proved to yourself that all of the wiring is correct, and the generator is properly grounded, you probably have a broken control board in the generator. To get the control board replaced use the same procedure as the relay above.

If that doesn't get this resolved for you post a comment and we'll try a different approach.

Regards,
Carl