Does the game have a sense of evil and good troops ?
 

I realize there are obvious issues if you mix certain troops (dwarves and elves for example) but does the game actually track morality? I.,e if one minute you have all good troops and the next all evil does it matter (as long as you don't mix them) ?

No!

Everyone hates undead and demons, but other than that, no.

Plants don't care (maybe even animals... )

Smattering of humanoids also don't care.

Also dwarves hate elves and vice versa....

And if there is paladin tree talent which removes morale penalty for having demons or undead in you army, then there is no way to remove penalty if you have dwarves and elves together :)

Dwarves get -1 morale for being in the same army as elves, -2 for undead, and -3 for demon.

Elves get -1 morale for being together with dwarves, -2 for demon, and -3 for undead.

Humans get -2 morale for being together with demons and -2 for undead.

Orcs get -1 morale for being together with undead.

Neutrals, undead, and demon will never have their morale decreased for being with other races.

With the exception of green dragon. They don't like giants. I think its -3 rep :)