What will be the toughest scenes for PJ and the LOTR crew to pull off?

Here's what I think: (order very, very approximate) 1. Bridge of Khazad-dum (The Balrog... duh) 2. Battle of the Pelennor Fields (more specifically: Eowyn, Merry and the Nazgul) 3. Mount Doom, destruction of the Ring, Sauron's death And many others - Shelob's lair, the destruction of Isengard, when Frodo is stabbed after putting on the Ring in Fellowship, Helm's Deep, et cetera, et cetera...

The Balrog scene, definitely.

Any battle scene, especially last one, will be tough. As for the Balrog, CGI people will handle that easily, IMHO. Remember that in the book we don't actually "see" much, and Gandalf is merely retelling how it happened: so treated in quick little scenes, in a very energetic flashback, it will be nice. (Remember how Bakshi handled it!? A flashback gives the director more liberties...)

I am worried about the shrinking of the actors. I can't help but think of the Brownies in Willow and how out of place they looked. I am sure the technology is better now. But I hope I am not concentrating on them instead of the locations which are supposed to be exceptional and give a "real" sense of ME.

They'll be using a blend of the forced perspective techniques developed by Pacific Renaissance for HERCULES and XENA along with the CGI reductions. You probably will be hard-pressed to notice the differences.

One scene that could be really good or really horrible is the destruction of the ring in Mount Doom.

As for this forced perspective stuff, I was reading about it, it sounds really great. I think the hobbits will be wonderful and that we have nothing to fear about that.

I agree totally... same goes for the Balrog, of course...

One scene I am not in the least bit worried about is Helm's Deep. I think what they're going to do to it is going to be absolutely spectacular. Pelennor is going to be significantly more difficult, though...