Interesting article here at Gamasutra looking critically at types of UI. He’s contrasting diagetic (exists in the game world) versus non-diagetic user interfaces, although he touches on other types briefly. His point is that diagetic UI can’t really exist on it’s own, and works best when mixed: however regardless of how you make your HUD, it’s important to be both functional, and have the UI act as a way to “translate” your player’s awareness of his avatar self. By translating increasing identity between the player and avatar and avoiding what he humourously describes as “a hovering box with a mounted machine gun.”
I agree with him, but I think it is possible to have 100% diagetic UI depending on the genre. Any game with a cockpit can be so, because all instrumentation can server as HUD display, even waypoint markers or plot dumps. I don’t think it’s possible in an MMO or FPS. Resident Evil tries to make health a heart rate monitor, with faster pulses and red color to show health. It works, but then you’d have problems explaining why any soldier needs to have his heart rate information available to him.
He shows a fully modded WOW interface and to me it looks like button hell. Functionality is one thing, but I can’t see how an average or new player could make use of it with a lot of training.