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I understand they cast spells as a sorcerer, per RAW:

Spells: A dragon knows and casts arcane spells as a sorcerer of the level indicated in its specific description. Its caster level depends on its age, as shown for each type.

and

If you’re a bard or sorcerer, you can select any spell you know, provided you are capable of casting spells of that level or higher.

To cast a spell, you must be able to speak (if the spell has a verbal component), gesture (if it has a somatic component), and manipulate the material components or focus (if any). Additionally, you must concentrate to cast a spell.

  1. Do they they need to do the somatic and verbal components and have the materials?

  2. Is there any precise source in 3.5 or Pathfinder that indicate that they do not need those?

  3. Would it affect game balance if they don't, like if those spells were spell-like abilities?

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Short Version

  1. Yes.
  2. No.
  3. Yes.

Long Version

If a creature casts spells like a sorcerer or other class that casts spells, unless the creature's description offers an exception, its spells are cast normally: the creature needs to satisfy all of the spell's components for the spell to be cast.

I'm aware of no text for either game that lifts the components restriction for creatures generally, although some specific creatures may be able to avoid naturally having to fulfill one or more components (e.g. the D&D 3.5 creature the phaerimm (Lost Empires of Faerun 187–9) that uses its spells known like spell-like abilities). (Note that a creature with innate casting yet an inhuman body shape—like a shape that lacks hands, for example a guardian naga—must and still can, despite that shape, meet a spell's somatic components—see this question.)

The Draconomicon for D&D 3.5 does say

As noted in the Monster Manual, creatures with innate spellcasting abilities, such as dragons, do not require material components to cast their spells. If a spell has a focus, however, a dragon or other innate spellcaster must have the focus on its person.… Except for not needing consumable material components, dragons cast their spells in the same way other arcane spellcasters do. They are subject to arcane spell failure if they wear armor. (24)

However, the Monster Manual does not say that anywhere that I can find. In fact, its glossary entry on spells says that a creature with innate spellcasting "does need material components for its spells" (315). The DM must decide if the Draconomicon's misremembering of the rules is sufficient to exempt dragons—and, perhaps, all other spellcasting creatures—from needing material components. (In this DM's campaigns, dragons and other creatures that cast spells innately still need material components, and PCs have found them still reasonable threats.)

Game balance would be altered radically if creatures that possess innate spellcasting ability did not actually cast their spells and, instead, used their spells as spell-like abilities. The biggest deal would be that the creature would ignore the cost of expensive material components like, for example, the 250-gp ointment needed for the spell true seeing and the 25,000-gp diamond needed for the spell wish. Such a creature normally must acquire and expend these components; not needing them anymore vastly increases its power.

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  • \$\begingroup\$ Worth noting: The ability to cast without the inexpensive material components used by most spells is just a single feat, Eschew Materials, which a dragon can easily take. \$\endgroup\$ – Quadratic Wizard May 13 '18 at 17:14
  • \$\begingroup\$ Nevertheless, outsiders and such can cast them without material components. Think of solars, etc. with a similar CR (comapred to great wyrms). Phaerimms, Mind flayers, dragons, outsiders, rakshasas, etc have sorcerer or cleric lvls, and I would'nt find that those endgame world threatening monsters (in some cases) would be broken with that. That explains why the Phaerimms destroyed the Netheril and Sarrukh empires... \$\endgroup\$ – François-Olivier Guay May 13 '18 at 20:36
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    \$\begingroup\$ @François-OlivierGuay RE: "[O]utsiders and such can cast them without material components." Where is that? It's not in either game's description of the outsider type, here and here, for instance. Anyway, this DM sticks pretty hard to the rules when making monsters and assigning wealth by level, and expensive material components are part of a creature's WBL. It only takes components for a wish or three in Pathfinder to add up pretty quickly! \$\endgroup\$ – Hey I Can Chan May 13 '18 at 20:44
  • \$\begingroup\$ Sorry, I was referring to spell-like abilities. Since they usually have a lot of them, these are very strong. \$\endgroup\$ – François-Olivier Guay May 15 '18 at 6:27

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