Ah, that sounds pretty cool, though it'd take alot of custom-skinning and trying to work out things like breath weapons and magic. Its been awhile since I read DragonLance but heres an idea for some more factions.

Elves:
Qualinesti
Silvanesti
Kagonesti

For some reason I can't seem to remember the names of the dwarven kingdoms, though I think they were divided to hill and mountain dwarves, and of course there was a gnomish kingdom. You could include a kender kingdom but it'd be kind of odd since they were just a few scattered towns and tended not to fight. For humans I can't remember any major cities, besides for Pantalantus as a major city and such, and Solanthus too I think?

Its been several years since i've read them, i'll have to dig out my books and read through again.

For unit ideas theres obviously the various types of Draconians, Knights of the Black Lily, Dragons, evil mages/priests. You could also do hireable mercs in the form of characters from the books, make them really buff and able to actually help in battle. You could also have the three schools of magic in as resources in various regions, so only they can produce White/Red/Black Robed Magi.

Thats just some stuff off the top of my head though, i've got to look through the books again for more ideas. I'm not sure if you'll be able to get alot of support for the mod though, LotR is the "in" thing at the moment despite DL being being a better series. :P As for how to do dragons, perhaps its best not to try and make them flying. Just use elephants as a base and have their wings folded in. They would be terrors on the battlefields given the right stats, and with the pre-coded bonus versus elephants you can assign to troops it'd allow you to make dragon-killer units. I'm not sure how to handle breath weapons though.

For magic units you could have them use flaming arrows by default(not sure if this is possible) to represent fireballs, and then give them something like the druid/screaming woman abilities to encourage/frighten troops. I don't think assigning effects like slowing down enemies will be possible with the engine unless the modding tools CA releases allow ALOT of control. Anyway, i'll stop rambling on. Its a great idea, I hope to see it get off its feet.