I have two hard drives on my PC and use the second one to backup all the files on the first one.   I use both WinResq and Second Copy to backup files and they work well for general Windows crashes, file corruptions, and other selective backups.  However, when my hard drive failed and I had to reinstall Windows XP on a new one, I still had to reinstall many applications.    Just transferring all the files from the second hard drive didn't work completely.    

Recently, I tried a different approach and made an exact image of my hard drive to my backup drive using a nice freeware program called Drive Image XML.    I was also surprised at how quickly it made an image of the whole drive.   So if my HD crashes again, I can just switch drives and be ready to go in 5 minutes.  It will boot and load everything just like the original drive.

I'm interested in anyone's opinions about the pro's and con's of backup of individual files VS. backup by cloning a HD sector by sector.

Disk Imaging is a good technique, that's why nearly all computer manufacturers use it.
The down side is that it returns your computer to the date when the image was made. Anything after that is gone, unless you have current file backups.

Many people use the method of formatting the hard drive, getting a perfect operating system and major programs install, then doing a disk image. Make file backups on your daily work and must saves, then when the crash comes, you simply reload the perfect disk image, put your file backups on it and you are ready to go.

As in most areas, the best system is a combination of both methods, but few have the time and patience to implement it.

   I agree with dlwolff0.
   Adding to his comments, I have tried some free disk imaging programs and have been very disappointed.  They backed up fine but then when I wanted to restore the image it could not be restored because it was the image with the system on it.  The software did not warn of this limitation ahead of time.  If the system was installed and running, I could restore ndividual files from the image but that makes the program equivalent to backing up individual files.
   There is good disk imaging software out there but there is also the fake software that I came across.  Beware.

The way I am using the Drive Image XML program is that it simply clones my active hard drive to my backup hard drive.  There is no image to restore.  In case of failure of the first drive, I simply boot from the second drive, which is ready to do.   I tested this and everything went fine.

   That sounds like a good way to do it.
   The way I used DriveImage XML, it made backup files and not a clone drive.

I use a program from PARAGON to make a disk image of my C drive.  The image is written to one of my other hard drives.  In the event that my C drive becomes damaged or Windows has a bad problem, I just restore the image to either a new drive or the  C drive if it was a software issue, which required the restore.  Paragon rums off a floppy, so I do not need a hard drive to boot from, in order to get Windows restored.  Paragon accesses the hard drive with the image of my C drive.
I have 3 hard drives.  My C drive, where Windows resides, has no user files on it except for system files related to EMAIL and EXPLORER.  All my other files, including MY DOCUMENTS, are on other drives.  All my user files are backed up via Winrescue and written to one of my other hard drives.   I have all my files organized such that if a loose a drive I can quickly restore a file or a drive.  

I use Paragon Disk Manager (free from a magazine cover DVD) to back up regularly.

The most important thing is to have a separate partition for the OS (C:/) and keep programmes on other partitions.

Win XP Pro only needs 20Gb so it's not too hard to back it up daily (if you're tired of re-installing the OS). Takes about five minutes to back up and same to restore.