I particularly like the damage system in the game I'm playing right now.
Call of Cthulhu: Dark Corners of the Earth.
There's 4 different types of healing equippment: Bandages, Sutures, Splints, and Antidotes. There is a 3D model of your character, Jack Walters, in the inventory screen, which progressively displays your state of health.
Here's the interesting part:
You only take damage where you've been hit, and must heal it according to how it is.
Let's say you got shot in the arm by a fishman bent on filling you with lead. You can still walk at a normal rate, but your aim with firearms is decreased fairly, heavily if both arms are broken. A broken arm requires a splint, a cut arm requires bandages, a deeply cut arm requires sutures. Heavy bleeding can eventually lower to light bleeding, but you can also bleed to death depending how many areas require sutures.
Broken legs hamper your speed, and also must be treated with splints.
A cut to the face hampers vision.
I don't think I need to explain a lot more. It sounds complicated, but honestly it isn't and adds a fair amount of atmosphere to the horror theme of the game. It's not so realistic that it's frustrating, but enough so it's interesting. The premise is that you're a poorly protected private detective vs. the dream's of H.P. Lovecraft.
It's a good game, and isn't too expensive on steam. I reccomend it to horror fans, Lovecraft fans, and even action fans, because it isn't fill your pants with crap scary, but still creepy and interesting.
Besides this (which is the best damage system I've seen recently), I prefer Health Bars I guess when it comes down to action games, but why do we need realism in damage if the character isn't realistic? I doubt freaking Master Chief who probably wears about 300 pounds of armor is going to take damage the same as some guy in normal clothes.