After upgrading a system from ESX Server 3i to a newer version, the boot loader displays the following message during boot:
PANIC: Cannot open state.tgz
After this message is displayed, the boot process stops. ESX Server 3i Embedded and ESX Server 3i Installable maintain their configuration state differently but make use of the same scripts. Due to an insuffient error check in one of the scripts delivered with ESX Server 3i, ESX Server 3i Embedded might incorrectly create the file state.tgz, which is only used by ESX Server 3i Installable. If this system is upgraded to a later version of ESX Server 3i Embedded, the next reboot might fail with the error message listed above.
This problem is fixed in ESX Server 3.5 Update 1 by improving the error checking in the configuration state management scripts so that they do not incorrectly identify an ESX Server 3i Embedded system as an ESX Server 3i Installable system or the reverse.
To work around this failure, boot into another operating system that can mount the filesystems on the USB key. On the Hypervisor1 partition, open the boot.cfg file. From the line beginning with module= delete the string --- state.tgz.
Based on VMware KB 1004364