What exactly does removing the directories when using nLite do? Will it screw anything up? I notice after removing them that the size of the ISO is incredibly smaller then keeping them. Are there any risks with removing them?

If you mean folders such as SUPPORT and VALUEADD, nope, there's nothing installed from them.

So selecting to remove DOCS, SBSI, SUPPORT, and VALUEADD under directories is perfectly safe?

I guess it is. They're just "extras". If you don't know what that folders are good for, you don't need them. If you will need some tool or anything like that from there in the future by accident, you can still get it from the original cd. Anyway, that stuff is intended to be installed additionally (if needed).