Unfortunately, I don't think there is a previous version that supports Win98 for hot-clone. Even the old P2V Assistant, which is the precursor to Converter did not.
http://www.vmware.com/support/p2v21/doc/p2v2_supportmatrix.html
What the text you've quoted is saying is that a disk-based clone of a source image may work, but that reconfiguration of the guest OS may be required to get it to boot in a virtual machine. There's a few things to work through here:
The confusing bit about the text you've quoted is what is meant by
"source image". What is meant is a backup image or raw disks via a
cold-clone. There is no support for hot-cloning a Win98 because there
is basically no way to get an "image" from it.In order to get disk-based cloning you'll need to follow one of the
suggestions from my previous post. Either use a supported backup
product and version on your machine and use the result of it for the source image,
or do a "cold-clone" conversion via a boot cd. Though somewhat difficult, it is possible to wrap a backup image in vmdk or create a vmdk by hand, and this is the bit that would require additional reconfiguration as Converter would have done it for you as part of the conversion. Workstation doesn't have a reconfigure-only option though, but the free standalone Converter application does just for cases like this.When you "hot-clone" a running machine, it will either do volume-based or file-based cloning but not disk-based. Even volume-based cloning however requires that an VSS snapshot be taken, which isn't possible in Win98. For WinNT/2k a special snapshot driver is used, but I don't know if this would work with Win98 either.
If you don't have a supported backup product already, then going with a BootCD may be your best option. However, unless you also happen to have an enterprise license for Converter it won't be readily available for you. 
However, there are people who have worked around this using BartPE and Converter Starter Edition. I would search the forums for solutions to this. A quick search pulled up this thread in which people had done this successfully: http://communities.vmware.com/thread/60667 . It might require a bit of tinkering to do youself, but is probably not extremely difficult if you can find a step-by-step guide. Just note the Windows licensing restrictions if doing this.
Well, I hope this helps get you going in the right direction at least. Good luck!