Yea I agree, it would be very interesting to see a mod like this, it would add more tactics to the game. You'd have to worry about Mages throwing fireballs and Priests healing or resurrecting troops.

Your Cavalry would have another job, charging down mages and priests provided they actually dodge those fireballs. I would imagine they would add an entire spells system and more interesting fractions and units.

I wouldn't like to see it set in middle-earth, the setting is kinda limited (there are only five wizards i think) and its getting abit old now. One idea I have not seen -Ever- is a Total War set in the Forgotten Realms, that would be an interesting setting, which would provide something different to LOTR. Just look at games like Baldurs Gate and Icewind Dale, those were both excellent games.