I've been playing around a bit on the demo site with badges and they look great. From a high school perspective anything that emulates Xbox live achievements for the kids is brilliant and they'll actively compete to collect them.
One modification I would make though is where they're displayed. They should be prevalent when the pupil logs in, maybe on their my moodle page rather than hidden behind a few clicks on a 'my badges' page, or at least the most recent 5 or so could be displayed there along with a link to the my badges page so they can manage them and gaze upon the wonder of their collection.
Is there currently a pop up or message sent to the pupil telling them that they've just earned a badge? If not could this be implemented so they get immediate positive feedback for their achievements?