You can simply remove the line in boot.ini that refers to Windows 98 as
follows:
Open Control Panel, open System, click Settings under Startup and Recovery,
click Edit under System Startup, save the file as a backup in case you need
to restore it, then remove the line referring to Windows 98.
That will remove the boot option but it won't restore the disk space as
Windows 98 will still be installed. For that, you would have to start over
as the XP boot information is on the 98 drive and if you format or otherwise
delete the drive, the system won't boot so you would need to do a new
install of XP requiring you to format that partition and then reinstall, all
of which can be done from XP Setup.