[This post was originally posted December 13, 2018, I am re-posting this in case it helps others]

Ever run into IMAGE_STATE_UNDEPLOYABLE when running Packer against Azure?

And it keeps going and going?

The issue here is actually with sysprep and not packer.

This error occurs because sysprep fails to actually set the imagestate value and is an issue with the Azure Agent.

See this post for information on the Azure Agent for details.

Thus, our solution is in the provisioners block on the Packer JSON.

Add the following to the provisioners section:

"Set-Service RdAgent -StartupType Disabled", # Add this line, disables the VM agent (WaAppAgent)
"Set-Service WindowsAzureTelemetryService -StartupType Disabled", # Add this line, disables the Windows Azure Agent Telemetry Service
"Set-Service WindowsAzureGuestAgent -StartupType Disabled", # Add this line, disables the Windows Azure Guest Agent
"Remove-ItemProperty -Path 'HKLM:\\SOFTWARE\\Microsoft\\Windows\\CurrentVersion\\Setup\\SysPrepExternal\\Generalize' -Name '*'" # Add this line, clears any Sysprep entries prior to running the actual sysprep command in our inline code

Final result:

    "provisioners": [
        {
        "type": "powershell",
        "inline": [
            "(Invoke-WebRequest -Uri 'https://raw.githubusercontent.com/ansible/ansible/devel/examples/scripts/ConfigureRemotingForAnsible.ps1' -UseBasicParsing).content | Out-File $env:temp\\ConfigureRemotingForAnsible.ps1",
            "powershell.exe -ExecutionPolicy ByPass -File $env:temp\\ConfigureRemotingForAnsible.ps1 -EnableCredSSP",
            "Set-Service RdAgent -StartupType Disabled",
            "Set-Service WindowsAzureTelemetryService -StartupType Disabled",
            "Set-Service WindowsAzureGuestAgent -StartupType Disabled",
            "Remove-ItemProperty -Path 'HKLM:\\SOFTWARE\\Microsoft\\Windows\\CurrentVersion\\Setup\\SysPrepExternal\\Generalize' -Name '*'"
          ]
      },
      {
        "type": "windows-restart",
        "restart_check_command": "powershell -command \"& {Write-Output 'restarted.'}\""
      },
      {
        "type": "powershell",
        "inline": [
          "& $env:SystemRoot\\System32\\Sysprep\\Sysprep.exe /oobe /generalize /quiet /quit",
          "while($true) { $imageState = Get-ItemProperty HKLM:\\SOFTWARE\\Microsoft\\Windows\\CurrentVersion\\Setup\\State | Select ImageState; if($imageState.ImageState -ne 'IMAGE_STATE_GENERALIZE_RESEAL_TO_OOBE') { Write-Output $imageState.ImageState; Start-Sleep -s 10  } else { break } }"
        ]
      }
    ]

This should now fix the issue and allow deployment to continue!