How can i create a clone of a windows xp pc to another windows xp pc.

I would transfer the XP machine to a VMware environment and backup that VMware environment daily.

The buisness is a pharmacy.  The pc in question is a small, but vital part of the production.  It is used for testing vials.  There are several com ports used for communicating with another piece of equipment that fill dosages.  I am not sure if that would work in a virtual environment.

The idea is to have another pc in place, with all the com cards installed, ready to replace the original one if needed. We need to clone the software and backup the reports and logs.  A backup is currently running every night.  We could have the pharmacists run a manual backup after each production.  However, if we could use a cloning software, that would update the second system throughout the day, or after new reports or logs are added, that would be optimal.

To have a hot-standby, you would have to clone/replicate the data you can not clone the whole system.
Does the setup support two XP systems connected to the devices at the same time.

Arnold. No. The setup does not support two systems.

Does the Application that is used have a database backend?  Is it using MSSQL, MySQL, etc. this way you can check whether it can be replicated. I.e. data added on one gets replicated to the other.

Is XP the only system on which it will run?
What is the Maximum Downtime that can be tolerated?  What is the issue that brought the system down?

A backup/restore is likely the only option based on the information you've provided.  Having two identical system on hand would deal with hardware failure other than hard drive.
Another option is to setup a diskless client setup.  I.e. the hardware will have to meet the needs (com ports, etc.) but the system will boot of the network.
In this scenario the network will be the bottleneck/RAM.

This is what I suggest--clone the hard disk drive with Clonezilla--its free a relatively easy to use (I can get you instructions if needed). Then once you have it cloned and ready to go (tested that it works) you then need to setup a backup process to capture the data that is created each day--I suggest a external rive which can be transferred to the cloned system in the event you need it. This way you have a cloned drive ready and a backup and restore process in place so that if the main system crashes you have the data and a cloned system ready to go. I can help you with an automated backup of your data if you want that!

http://clonezilla.org/downloads.php

You can get rid of HW dependencies (on XP) with tools such as HP/Neoware/Qualystem UbiBoot.
Unfortunately, HP has discontinued the HP Image Manager product that embedded UbiBoot.
But you can find a distro of HP Image Manager here:
http://www.megaupload.com/?d=Y52W9Q6A
Run an "extract" type installkation, select only client/UbBoot and the user manual. ANd you should then be able to build a Win XP setup that can run on different hardware (as long as they are using IDE/PATA HDD for booting).
The process involves moving the system HDD from master PC to standby PC and to let Windows detect the HW in standby PC. Then use this HDD as the base for your environment.

We will be setting up a second system with all pertinent hardware and software installed, test the system to insure it works.  The system currently in place is backed up daily.  In the event that the original system has a hardware failure, we will then restore the most recent backup and use the second system.

With HP image Manager (again), you can use ActiveCloner to clone your XP system drive onto another drive. This "other drive" can be a network share (in your case, some HDD in the backup PC).
What I would do:
1/
Boot your backup CD off something else than the HDD that will be used to operate it when it has to be used as a backup PC.
For instance:
- Use a LiveCD (for instance UBCD4Win) to boot your backup PC (so that you do not use the HDD to operate it) and customize this LiveCD so that it shares the HDD over the network
- Boot off USB (a WinPE or Linux environment and customize this environment so that it shares the HDD over the network

2/
- Create a (startup) script on the source PC so that it regularly clones its C: drive (and potentially other partitions) onto the target drive(s) on the backup PC. ActiveCloner (from HP Image Manager) can do that for you. There are very few other tools that can actually clone the C: drive of a running Windows PC. Usually, you have to boot your PC under some other environment in order to be able to access what is stored on the C: drive. There are some other tools though, live shadow-copy: http://www.runtime.org/shadow-copy.htm. But Active cloner can perform a differential copy: copy only the non-existing/newer/different files to the target system

Then, when you have to use your backup PC, just boot it off its HDD (and not off the other environment used to operate it when it is not used as the "main PC" and you are done.

This automates things a little and makes it easier to switch from the main PC to the backup PC. Moreover, the main PC does not have to be made unavailable when it clones its HDD(s) onto the backup PC.

Thanks viviqatt,

I will investigate your solution a little further and run it by the client.  I will close this question and award points in the next couple of days.