A system where instead of HP, there is blood, which you lose based on your wounds would in my opinion be far superior to the HP based system. This system, combined with locational damage and the realistic armor penetration you unfortunately had to scrap would provide amazing realism to the game. The stronger a character would be and the better the weapon he is using is, the higher his chance would be to penetrate the enemy armor and cause worse wounds, if not dismemberment. The weapon type would naturally also be taken into account in the calculations. (An iron sword should cut through flesh worse than a daedric one, for example and a daedric axe should penetrate armor more easily than a sword of the same material. Tsun should have no trouble cutting you into small pieces through your armor, while a bosmer rogue with a dagger would be mostly harmless unless he hit you in unarmored locations.) This all has probably been mentioned before and all this would naturally take a lot of scripting and AI modifying to make them fight effectively and I doubt it could be done in Skyrim, at least without horrible script lag, but it's nice to have some dreams.