But don't forget what holy water is good for:
1) Toss it at the last sighted location to "uncloak" HIPS-happy undead (with zero chance of damaging non-undead teammates, unlike acid or alchemist's fire).
2) Carry it for an easy RP-related means of revealing someone to be undead or infernal.
But yeah, the damage is kind of trivial. It doesn't make sense that undead should be able to fast-heal that kind of holy damage, either.
Throw some Holy Water on a suspected Undead. Be prepared for the "Owie Owie it's Acid!" Excuse, or the gigantic "You meta Gamer!" argument. Aside from the OOC baggage, 1 point of damage (which is what you get 90% of the time) isn't going to do you any good. It's right up there with a wooden stake and a vampire. Getting past that DR? With a Pointy Stick? Don't think so.
Now, having it work like an Alchemist fire (especially with weapons out there that went by the old term, Holy Water Sprinkler) where you can coat a weapon, that would be useful. Various levels of Grenade damage would be useful as well (to the point of having Unholy Water which would HEAL undead). Also I'm still not sure if it actually works against an Undead PC, if the various things like Vs Undead items don't work against them anymore either.
I would think though that the Gothic horror setting should take precedent over the typical wimpy DnD Holy Water. Holy Water, should make Undead critters run screaming as fast as Searing Light, or Hammer of the Gods.
~Rex