I have a damage mechanic that I need help with. A character can be Hurt, Wounded or Dying. With each state of health, the character suffers a penalty of some kind. A Hurt character that is Hurt again does not worsen, but I want them to lose something. I don't want to have them be 'stunned' or something (I've always hated 'lose a turn' mechanics. There's nothing more frustrating then getting Held in DnD). I'm thinking of some sort of token/resource mechanic, but I don't have a lot of experience with such things. Can somebody point me towards games that use tokens as a resource, or suggest something (anything)?

By tokens do you just mean a physical object that is passed around?

If you have an initiative system, maybe you could have injuries affect that somehow -- not so extreme as a total "stun." But really, I think we'd have to know more about the rest of your system to suggest different penalties, since we don't even know what other mechanics exist.

You asked for it :)
This is sort of a rough draft of the system. I'm trying to keep things pretty quick. Its for a sci-fi game that needs to be able to scale from small skirmishes to epic battles. I'm trying to keep most of the crunch in the form of hardware (ships, guns, robots, etc.)

I still haven't settled on an initiative system I'm happy with either.

CHARACTERS
You’re character will be made up of a written description that contains several keywords or “Traits” (such as “strong”, “brave”, or “cunning”). Traits are inherent abilities or qualities that will help your character during his adventures. “Flaws” are keywords that have a negative impact on your character’s performance. Your character will also have a number of skills with a number rating.

THE RULES
Skills are rated from 0 to 5. When you want to do something, the GM will tell you which of your skills is appropriate. Roll a d10 and add your skill number. If you have a Trait that can be applied to the skill attempt you roll an additional die (a d6 for a minor Trait, a d8 for a major trait), and take the best result of the skill die and trait die. If you have a Flaw that applies to the skill attempt your skill die will decrease (the d10 skill die becomes a d8 skill die for a minor Flaw or a d6 for a major flaw).

ATTACKING
To make an attack, roll a skill die. If you have a Trait that can be applied, roll that die too. Add the appropriate skill bonus to the highest die rolled ('Fighting' for hand to hand and melee weapons, 'Shooting' for ranged weapons). The attack hits if the attack total is 5 or higher. Ranged attacks may suffer penalties if the target is far away or in cover. Attack rolls against a target at Medium range suffer a –2 penalty, or –4 at long range. Attacks against a target in Light cover suffer a –2 penalty, -4 if in Medium cover and –6 in Heavy cover.

DAMAGE
Anything that can be damaged has a Toughness number. If the target is armored it will have an Armor number and a modified Toughness (the Armor number is added to the target’s original Toughness to get its new modified Toughness). Target’s can suffer light, medium or heavy damage. Roll your weapon’s damage dice and compare it to the target’s Toughness. If the roll is less than the target’s Toughness the target suffers medium damage. If the damage is higher the target suffers heavy damage. If the damage is greater than the target’s armor, but less than its Toughness the target suffers light damage. Damage that is less than the target’s armor is ignored.

DAMAGE EFFECTS
The effects of light, medium, and heavy damage depend on the type of target. Vehicles will lose various weapons, components and systems until they can no longer sustain such damage and are destroyed. Living creatures have three damage states: Hurt, Wounded and Dying.

... And that's where I saw that I needed a 'failure' mechanic for when characters get injured so that they aren't killed the 2nd time they are hit in combat.

You could consider having a list of random wound effects (like lower initiative, decreased movement, stunning, temporary loss of strength in one arm, etc.) for the different levels. Each time you get a wound you could draw a card or roll on a table and that would detail the particular effects. Also, have you condidered that after X light wounds that the X+1 light wound moves up to the next level? Then you could have traits for experienced warriors to have more light, medium wounds they can sustain before they get "bumped" to the next level.

So let me see if I have this right: you have three classes of wound, and when a character gets a wound of a given class his health is downgraded to a corresponding bracket. But if I'm at the "Wounded" health state and I take sixteen more medium grade hits...I don't get worse? Seems a little strange to me, especially for space ships where you're modelling attrition...is there some reason you want to have only three health states?

I guess, as things stand, my suggestion would be to give the character a temporary flaw that would hurt them in various kinds of checks. You could have it last just until the next action, or for some period of time, or whatever.

Edit: I just realized that I completely forgot about tokens, which you said you'd wanted incorporated into it. The following idea is stolen from somewhere else on the Forge but I don't remember where I saw it.

How about when someone gets a wound, the GM takes a token out and puts it in front of the player. When the character next tries something, the GM can point to the token and apply some kind of penalty, or even automatic failure. (And of course, the GM doesn't have to do it on the very next action, he can wait as long as he likes). Maybe allow the player to voluntarily use them too.