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When you try to delete or format this partition, you receive an error message that this partition can not be deleted for formatted, as it is in current use.
The unknown partition is created when third party software, for example "Restore IT" is installed, the software creates an image of the operating system during shutdown onto the unknown partition and is being used by the software, you can not delete or format the partition from within Disk Management as it is in current use.
This behavior is by design, the partition is there for Restore IT to use to store an image of your operating system, you can however remove the unknown partition by performing a complete clean install of Windows XP, removing the unknown partition and partition that Windows XP is installed onto, and use all the free space to install Windows XP onto.
Using Disk Management in Windows XP for basic disks - Restore IT Information and Support -