effect

Special effects
The Fellowship of the Ring makes extensive use of digital, practical and make-up special effects throughout. One noticeable illusion that appears in almost every scene involves setting a proper scale so that the characters are all the correct height. Elijah Wood, who plays Frodo, is 5ft 6in (1.68 m) tall in real life, but the character of Frodo Baggins is barely four feet in height. Many different tricks were used to depict the hobbits (and Gimli the Dwarf) as being of diminutive stature. (As a matter of good fortune, John-Rhys Davies — who played Gimli — is as tall compared to the hobbit actors as his character needed to be compared to theirs, so he did not need to be filmed separately as a third variation of height.) Large and small scale doubles were used in certain scenes, while entire duplicates of certain sets (including Bag End in Hobbiton) were built at two different scales, so that the characters would appear to be the appropriate size. At one point in the film, Frodo runs along a corridor in Bag End, followed by Gandalf. Elijah Wood and Ian McKellen were filmed in separate versions of the same corridor, built at two different scales, and a fast camera pan conceals the edit between the two. Forced perspective was also employed, so that it would look as though the short hobbits were interacting with taller Men and Elves. Even the simple use of kneeling down, to the film makers' surprise, turned out to be an effective method in the making of this illusion.
For the battle between the Last Alliance and the forces of Sauron that begins the film, an elaborate CGI animation system, called Massive, was developed by Stephen Regelous that would allow thousands of individual animated "characters" in the program to act independently. This helped give the illusion of realism to the battle sequences. The "Making of" of the Lord of the Rings DVD reports of some interesting initial problems: In the first execution of a battle between groups of characters, the wrong groups attacked each other. In another early demo, some of the warriors at the edge of the field could be seen running away. The reason was not that they were programmed for cowardice (or survival) and could not see the enemy so they just ran away, but that they were initially moving in the wrong direction, and had been programmed to keep running until they encountered an enemy.
The digital creatures were important due to Jackson's requirement of biological plausibility. All were scanned from large maquettes before numerous digital detail of their skeletons and muscles. In the case of the Balrog, Gary Horsfield created a system that copied recorded imagery of fire.
source:Wikipedia