After experiencing a fair share of Illy combat, I do believe there are some fairly major flaws in combat.
First off, I think the terrain modifiers should be increased. I personally don't believe heavy cavalry should be able to kill a unit like archers on a large mountain with the effectiveness that they currently have, let alone spearmen. Instead of penalties and bonuses of 30%, maybe changing to 50% or more on the more extreme terrain (large mountain, heavy forest, buildings) and leaving the 30% for the minor versions (small mountain, light forest, large hills). As for cavalry on plains, I actually think they are fairly balanced at current numbers.
Not that I don't like heavy cavalry, it is just a shame that most players build nothing but T2 cavalry and archers. It would be nice to see a little more diversity, such as elves actually needing to invest into some infantry, or dwarves needing some spears to supplement their swords.
As for spearmen, I think the base training time on them needs some adjustment. When deciding whether to train spears or archers, the archers usually win because of the superior defense rating and that they train at the same speed. I know that a town can support more T2 spears than T2 archers based on gold per hour upkeep, but they can't produce an equivalent number in the same amount of time. I think a base training time of 7.2ph on the T2 spears, and 9ph on the T1 spears along with spears getting better terrain bonuses vs cavalry and such would actually make it a worthwhile decision.
There is a fair bit of situational readiness needed in Illy combat, but all to often the player with umpteen million T2 cav wins the day regardless of strategy.