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Still using the iPhone 4 but having migrated to iOS5 I can say that it still seems to work for me, badge correctly reflects flagged and due items.

Try to "un-due" one item (set its due date a few days into the future, obviously do not forget to change it back later :) ). Then completely close and restart OF.

If that does not work, did you restart the iPhone since you installed OF on it? If not, do so, to. Then let it resync.

If that does not solve it, no idea...