I am new to LR3 and have decided to convert RAW images to DNG on import. However, I have about 8000 or so JPEG images that I have brought in to LR and I am on the fence as to whether to leave them in JPEG format or to convert them to DNG. I know DNG will take up more space and I think I can live with that. The question is how much is gained by going to DNG from JPEG and should I do it. As I understand it, the XMP data for a DNG resides in the file where the JPEG data is in a sidecar. My photos are mainly family memories and I want to preserve them. Appreciate any comments/suggestions.
Benefits or disadvantages aside, you can't import JPEG as DNG in Lightroom (to my knowledge). If you import a JPEG file in "Copy as DNG" mode, LR will prompt an error dialog saying, in substance: "Non-raw files were not converted to DNG". What you can do, however, is select your JPEG file in LR, and export it as DNG, then re-import that DNG file.
DNG is really designed for RAW sensor data. For instance, your typical DNG file doesn't contain a color space. Its data structure, bit depth and format are very different from the RGB pixels found in a JPEG file. Think of a JPEG file as a "baked" version of a RAW file.
There is a "Linear DNG" variation that can store a demosaiced RGB image data arranged in a rectilinear format. It is supported by LR and is used for cameras with Foveon sensors for example. However, you do not increase the quality of your JPEG file by converting it to Linear DNG. Everything you can do with a Linear DNG you can already do with a JPEG file in the Lightroom UI.
As far as metadata and develop adjustments are concerned, they are stored in Lightroom's catalog file, unless you tell LR to export them automatically, or do so manually by selecting "Metadata -> Save Metadata to file". If your photo is a JPEG file, LR will create a XMP sidecar. If it's a DNG file, LR will be store these settings directly within the file itself. At this point, yes, you can say DNG is a bit more convenient, especially if you want to share these settings with somebody else. Personally, I do not let LR export metadata automatically for performance reasons, and I rarely save the metadata back. What I make sure to do, however, is to carefully backup my catalog so that these memories we are preserving are not lost. Look for "lightroom backup" on this site (or check this one specifically).
The only real gain is the ability to apply non-destructive edits to the image and to reset them inside the file, as you noted in your message. Bear in mind that it can't totally put you in the same position as the RAW source format since the actual sensor data is lost along with anything discarded during the JPEG compression phase. Beyond that, there really isn't an advantage since JPEG, itself, is a well known and massively supported format (much more so than DNG).
Anyways, I would suggest that if you do want to convert to DNG, that you only do it on an as-needed basis. There's probably not a lot of value in mass converting the whole 8000 up front.
XMP (sidecar files) are optional in lightroom. The benefit to using them is that any application that can parse them can make use of them, as opposed to the default behavior of storing edits and meta data inside lightrooms database.
Since you don't need to use XMP files, necessarily, the question is whether it makes sense to move to DNG.
In my opinion, there is no real advantage to moving to DNG. The file size is larger and sidecar files aren't that big (they may be irksome (especially on an SSD)). DNG really makes sense if you're looking to "archive" your raw files.