I'd argue the badge system, in so far as raiding goes, is flawed only in that they have set Heroics and 10-mans on the same badge level, and with 25-man naxx with 10-man ulduar. I understand that badges in raids are an incentive to help clear even if you get no drops personally, but what it comes down to unrelated progression paths being bunched unnecesarily together.

In my opinion, they should have 3 seperate PvE gear sets: 1 available from heroic badges, 1 available as drops from 10-man, 1 available as drops from 25-man. You still get badges from raiding, but only to artificialize drops to give something out to the unlucky.

At which point, you also get similar development time: ie, a new 5-man for every new raid, with hard modes and incentives that make the new 5-man a bit more reward-giving, but not trivializing current heroics.

That, or get rid of that damn week-long lock out on 10-mans.