Confirmed in W2K and XP if "keep sidecar files with master files" is ticked:
If you have a CR2 raw file (eg Canon 20D), a tif processed from the same file, and an xmp file all with the same name and in the same folder
eg test.cr2, test.tif, test.xmp
If you move test.tif to a different folder using the File Browser, then test.xmp will move with it leaving test.cr2 in it's original folder with no xmp file.
I believe this also happens with some other Canon raw files and I have heard it also happens with Macs, however I have only personally confirmed it as described above. It may be it happens with other non Canon raw files too. I do not know if the same option exists with CS2 or if the bug has been fixed.
Because of this bug, while I always use xmp sidecars, I never tick this option as it has the ability to destroy part of my xmp based archiving and image processing workflow.