You cannot, under normal default, delete the "Documents and settings" folder. You can manipulate the privilges through the security settings, which will enable you to eventually perform the deletion. It would be VERY unwise to do this however. It will cause several problems on your installation. One will be interminable duplication of folders and files. You will also find problems with attempting to install legacy programs. If you have the normal "View" defaults set in Windows explorer, you should not even be able to see "Dcouments and settings"
Your question. Yes, unfortunately it does use real space. Withe the size of HD's today, this is not often a problem. I have mine unsecured, for personal test reasons, and can examine it. It takes about 1.7GBs. The majority of the folders and files in there are located now under "Users" - "username"