It means exactly what it says (the "say we did" part may or may not be sarcastic) but is often said in a patronizing tone or otherwise as a witty remark in a variety of situations.
Bloke: Uh let's not and say we did...
Pissed Dude (Getting Carried Away): Huh that 60 year old barmaid looks like such a slut. I bet you could pull her. Infact I bet we could be fucking her from both ends at the same time before the night's out haha, that's how much of a desperate slut she is.
Other Guy: Haha yea but let's not and say we did!
Pissed Dude: Hah damn right
Ed: I can't wait to see that on video double d.
Edd: let's not and say we did ed!
Steve: hey tom let's go and dive into that bucket of cement.
Tom: Let's not and say we did Steve!