I just ran into this issue trying to convert a Windows 7 virtual machine (VM) running on vSphere 4.1.
If you really need to use Converter then you can change the VMs setting for the Operating System to something else (like Windows XP) and this will allow converter to work. Just remember to change it back (to Windows 7) when you convert it back!
My prefered workaround for this issue is to simply export the virtual machine as an .ovf.
Shut down the virtual machine, select it in the inventory and then click File, Export and Export OVF Template. Save the .ovf file or folder (depending on your preference) locally and you are good to go.
In my virtual machine Windows 7 occupies 9.61 Gb – my exported .ovf is a nice and tidy 4.48 Gb.
Just for reference, these work-arounds apply to VMware vCenter Converter Standalone Client version 4.0.1 build 161434.
Hopefully this will be fixed in a later release.
Source: VMware Communities.