I think one of the real questions here is how does the game determine this exactly.

It starts at the first player and rolls a number from 1-100. If it rolls <5, you win loot. Then it goes to the next player. The game doesn't care what any individual player rolled, so once under a blue moon it might be possible for all 25 to get loot. (The actual chance might not be 5%, but you get the idea.)

This is why there is no concept of passing or anything else, because whether you win loot or not has no bearing on whether other players win loot.

This is sort of off-topic but semi-related, but how will World Bosses work?

Will they use the LFR loot system or require that I be in the group that tagged it? I foresee a lot of same-faction griefing if it didn't use the LFR one (ie: pulling the boss early and dropping combat immediately forcing it to respawn several minutes later in a different location, or just plain pulling it early to wipe the group before they're ready) or pulling a lot of extra nearby mobs, etc.

We might have loot work slightly differently on the two world bosses since they appear at different frequencies. In general world bosses work exactly like LFR. If you want to invite everyone in the area into the raid, it won't diminish your chance to get loot. The only reason to not invite people is if you want to be a jerk for some reason. Individuals do have to be in the group that has loot rights (i.e. tagged the boss). We are fine with there being some competition especially on PvP servers; that's part of what world bosses are all about. If you just loiter in the vicinity and do a little damage but aren't part of the raid group, you won't have a shot at loot.

I know you didn't mention here, GC, but someone (Blue) has in the past, and that is the idea that the mechanism for LFR loot distribution may be that the game chooses X random people to win loot, where X is some number either hardcoded into the loot system, or chosen by some other mechanism at the time the loot drops (for example).

We considered that approach, but were concerned that it would pressure groups into killing a boss with the smallest group possible. Theoretically if you killed a boss with 5 characters, then each would win loot and you would be motivated not to invite friends or strangers. We went with a model where the number of characters has no bearing on whether you win loot or not.

All of this is for Raid Finder and world bosses. Dungeon Finder (for now) still uses the Cataclysm system and guild raids use whatever system you want, such as Master Looter or Free for All.

So does that mean if you win something in LFR in mists it is NOT tradeable?

So if two friendly priests queue for LFR and one of them wins a piece that he already has, he cannot trade it to his GF who actually needs it?

Correct. Being able to trade loot works great with groups of friends. It can work okay if you are a nice person, but there isn't much incentive to look out for your fellow players if you aren't likely to ever group with them again. Overall it just seems to cause loot drama. "Trade with me, because I ran this raid a dozen times and didn't get the drop." "Trade with me, because it's a bigger upgrade for me than you." "Give me that item, because I inspected your achievements and I raid more than you." This anonymity is one of the weaknesses of Raid Finder for sure, but we think in the long run that the strengths of being able to join a raid whenever you want outweigh those limitations.

Will it select loot as it deems "appropriate" for just the class in general, or for their specific spec? I would really hate to win loot, just to find out i received an item for holy, when I am playing Ret.

It looks at your spec, not your class. We decided it was a superior design to give you something for a role that we know you use rather than trying to guess whether you ever like to tank or not. There are plenty of other avenues (dungeons, factions, scenarios, crafting, the AH, PvP, guild runs, etc.) to gear up for an alternate spec.

With random rolls you don't really get that feeling because it is all visible and most people don't believe that Blizzard is altering the /roll just for them (although sometimes it feels that way). The new LFR system doesn't look very transparent, and so a person constantly seeing nothing go into their bags might lose hope that they will win anything and stop raiding altogether.

Possibly, but there are plenty of cases today where players don't believe that random roles are random. :)

The new LFR roll system SUCKS