To Remove the Red Title class from the Styles drop down, open the fckconfig.js file which is located under the HTMLEditor folder and replace this code:
FCKConfig.CustomStyles =
{
'Red Title' : { Element : 'h3', Styles : { 'color' : 'Red' } }
};
with
FCKConfig.CustomStyles =
{
};
In regard to your second question, you will need to reenter the wizard and select your css file in order for the editor to create your styles xml file.
If you are having issuing reentering the wizard then you will need to create the styles xml file manually and also edit the js file under your custom folder to reference your css and xml file.