I am a huge fan of anything Middle Earth-related! With that said, I HATE the idea of re-theming Toon Lagoon for 2 reasons:
1. Maybe I'm in the minority, but I love Dudley and Bluto. They are two of the best water rides in Florida, and during the warmer months, are extremely popular. I know it's capacity isn't the greatest, but there's been times when I visited IOA and Dudley has the longest wait time in the park. If you don't like being soaked don't ride them; but I know a lot of people who do enjoy them both immensely. And besides, don't people complain about the lack of family-friendly rides in IOA already? Killing those two would be a poor decision.
2. Middle Earth deserves a land of epic proportions. Toon Lagoon simply isn't big enough to to contain Hobbiton/The Shire, Mirkwood, The Misty Mountains, The Mines of Moria, Rivendell, The Lonely Mountain, Laketown, Rohan, Gondor, Isengard, Fangorn Forest, and of course, Mordor/Mount Doom. This property deserves to be done properly. The only way I see that is through a third gate. What Universal has done with the Harry Potter franchise has me salivating for what's possible with Middle Earth. I don't want to wait that long, but if they do build a third gate, and LOTR/The Hobbit is a big part of it, I believe the wait will be well worth it.