Arrgh, it's again one of those "I know the answer, but I don't remember who said it, or where, so I could have dreamt it".

I think it was said that there will be water, and water combat, but the game isn't centered around it. So it'll mostly be a matter of transportation, and obstructing it.

You are remembering correctly.

If they don't do alternate planes, but rather just underground, they should have the sea-floor where there is water.  

If this game is like Master of Magic, Heroes of Might and Magic, and other such games, the water combat will likely be the same as the ground combat, except with water tiles that only water guys can be on.

That also being said, I doubt that water combat would make a particularly good expansion unless they added bizzaro features like floating cities and such.  (that would be really cool I think)   Then you could have steamships, kelpies, and dragon turtles.

At least not without some pretty big magic. With the right spells, though, it could look really neat to have horse cavalry riding over undersea plains while shark cavalry swoops down on them.

I missed the talk from Frogboy about no tactical water combat. Was aerial combat mentioned as well? Seems like if underwater fights are too much code bother, flying cavalry would be also.

Maybe when we're near to seeing common 128-bit machines, the successor to the Elemental engine will be able to handle 3D tactical movement as well as figure modeling.

In a couple of the previews at other sites he mentioned that naval combat would be simplified.  I believe somewhere on these forums he also mentioned that he's opposed to flying units, but I may be wrong.  I'm sure there will be units with wings (dragons, for a start) but I don't think they'll be able to remain out of reach of ground units during combat.  To be honest, that alone was responsible for some of the cheesy tactics in MoM (invisible flying warships anyone?), so perhaps it's better that way anyway.

I don't know if they'll be able to fly over ocean squares on the strategic map, but I would think so.  It would seem strange to be loading dragons onto transport ships.  I've got no problem with individual special units like dragons and so forth being able to traverse ocean squares easily, I'd just prefer not to see large armies able to do so.  Even in the Silmarillion, I don't recall any such thing happening.

However, remember that we're being promised absurdly powerful Populous-style spells in the late game.  I wouldn't be surprised to see spells that can raise the land to create a land bridge for your armies to traverse, or a spell to temporarily part the sea and hold back the water for as long as you're willing to expend power on it while your army passes though.  I'd have no problem with that, and it would be quite cool. I'd just prefer not to see regular army units that can freely traverse ocean squares throughout the entire course of the game.