What is an XMP file,please?

It's a file for metadata, similar to IPTC. When you add file info in Photoshop (File>File info), such as title, captions, keywords, etc., this is metadata which goes into the XMP file. This is probaby a pretty simplistic description. Others will know more. ;)

Here's a link to what any file extension means. - http://filext.com/

Open it with word or wordpad and you can read it's content and will tell you what it is. I don't know if different applications generate something similar but in my case they are created Adobe when opening one of my Canon 20D RAW files as it seems to keep track of my settings for that RAW fle.

"Adobe's Extensible Metadata Platform (XMP) is a labeling technology that allows you to embed data about a file, known as metadata, into the file itself. With XMP, desktop applications and back-end publishing systems gain a common method for capturing, sharing, and leveraging this valuable metadata ﾗ opening the door for more efficient job processing, workflow automation, and rights management, among many other possibilities. With XMP, Adobe has taken the ﾓheavy liftingﾔ out of metadata integration, offering content creators an easy way to embed meaningful information about their projects and providing industry partners with standards-based building blocks to develop optimized workflow solutions.

For a complete rundown check out Adobe's website, I found this in less then 30 seconds.

The XMP file contains any modifications you make to NEF files using ACR - the NEF files themselves are not changed. If you back up the directory, save the XMP files too, as well as the Bridge cache files.

In Adobe Bridge, if I highlight an image, then open the conversion dialogue, via <ctrl> "r", then click on the little > button to the right of "settings", then preferences (or <ctrl> "k"): I see choices:

Camera Raw Database or Sidecar .xmp files

I think choosing the first will stop generation of these files.

For the ones that already exist, (assuming windows system), I'd sort the directory with those files "by type", and delete the lot. Just to be on safe side, don't summarily delete, just send to recycle bin.

Personally, I don't like a program that generates massive new files, find it an irritant.

Just a minor addition to Peter's post. Do your file sorting from within Bridge and your .xmp files will be moved automatically with your image files. You can also filter them out in Bridge if the icons annoy you.

the only reason for writing to a central database is that you don't generate the extra .XMP files.

This is incorrect. One can gain a lot from the usage of a centralized cache.

You can ensure that your images and the central cache are always on separate physical hard drives. This removes a major performance bottleneck as one disk can now read while the other writes. This can create an order of magnitude of performance improvement in worst case scenarios.

As someone who deals a lot with various XML files, XMP are simply "XML for Photos", hence its name. It's really that simple. XMP's simple encode the data transformations made in processing your Raw file to the photo editing tool's workspace.

Think of it too like this:

XML is to data description as to how HTML is to layout description.