What needs balancing in the game?

They should split the Defense and Attack stats to Physical and Special defense/attack just like in the main series game. This will help MANY of the attackers that got their attack screwed over by averaging their awesome stat with their awful one.

You've got to imagine that Gen 2 will change the balance. I just hope they don't make the same mistakes that lead to one Pokémon dominating the game. All the gyms by me are at least half Dragonites.

I don't mind that it is easy to get a vaporeon. It makes the game more accessible to those who don't play frequently.

I think the biggest dilemma is how to make it worth the effort to build really strong attackers/defenders. Until the recent update, gyms were stagnating with multiple high CP dragonites. I see that this gave newer or less regular players few opportunities to have high enough CP monsters to get (or at least stay) in friendly gyms, let alone collect coins for taking down an enemy level 10 (although if they team up with friends it was certainly doable). But the change in prestige gain for levelling friendly gyms has now made it much harder to level gyms up and the change to prestige loss for enemies makes it much easier for even lower level players to knock them down. This is obviously good for lower level players to at least turnover one or two gyms and collect a coin or two. And it might not be a problem so much for the cheating spoofers/bots. But the real losers now are that this has removed a lot of the incentive for more experienced players ( non cheating!). Whats the point working hard to learn all the stats and focusing on leveling up high IV mons with a special place in an attacking defence role, when any old collection will do for knocking down an enemy gym and even an optimal grouping of high CP defenders can't really defend? Ironically, these days I rarely use my elite attackers much at all and instead spend most of my time using a motley group of really low CP critters to try and level up a place in a friendly gym. Its boring, and with winter coming, not worth the cold fingers.

They need to fix the formula for combining special attack and attack. Right now they give each of them equal weight but they need to give them weight based on the ratio of special stack to attack

Reduce Dragonite cp

I never understood why they removed Dragon Breath from Gyarados. They saw there was a problem with people getting too many Dragonites too easily, and then they decided to remove one of the good answers to Dragonite. O_o

Likewise with removing Rock Throw from Omastar. Having a pokemon with moves strong against Lapras with a resistance to Ice shouldn't be a bad thing. And Mud Shot was a weird replacement because the pokemon I would use Omastar with Mudshot against (Rock types and Fire types) would be much better to use Water Gun against for STAB.

Gyarados +Dragon Breath
Omastar +Rock Throw, -Mudshot

By balance do you mean where free casual players can dominate gyms and where high active players who spend cash can occasionally beat a players who plays less and doesn't spend any money? I have a 525Km walked and I would be pissed if somebody with 250Km could dominate me in any way on this game.
If a 1000cp Hypno could take out a 3000cp Dragonite who would catch dratini's? If a common mon was the best counter for a super rare mon only found in rare 10K eggs, who would buy hatcheries? There has to be rewards made to players who spend money on the game and the game must be designed in a manner that allows the game to be profitable. Active cash players must dominate casual free players and active free players.