Apparently New Line tested the encode on the theatrical cut of FOTR (i.e., shortest among all possible versions) earlier this year, and found out that it could fit on HD DVD (which is a 30 gig format). Mind, this was before the huge push for lossless (although compressed) audio across the board, so it's possible that the encode was optimised for your regular lossy Dolby or DTS audio, leaving more space for the video. At that time, it was hotly contended that the 30 gig isn't enough for any of the extended cuts, especially ROTK; and the popular perception is that the new formats, with their vastly increased storage space, ought to end the splitting of the movies across two disks.
(This argument, btw, is utterly invalid -- full HD picture is six times larger than your regular DVD picture, and it's progressive, while none of the new formats are in themselves six times larger than your regular DVD-9. Actually, double-layer Blu-ray is somewhat close at 50 gig, but then you're just approaching equality with different initial factors. The answer seems to be in the newer video codecs -- DVD uses MPEG-2, while the new formats use VC-1 [rebadged WMV] and MPEG-4 [AVC], which are more efficient. But both are still improving, and aren't ready to squeeze ROTK EE on even a BD-50 disc.)
The larger issue, of course, is that of the popularity of the new formats, and the ongoing format war. New Line cinema entered the hi-def arena only last month, with their first release,
Hairspray, being a Blu-ray exclusive for the moment (Blu-ray is region-coded, and as the film still plays in overseas territories, this enables them not to impinge on foreign distributors' release plans). In fact, all of New Line's releases are temporarily Blu-ray exclusive, except for their sole "catalog" release,
Pan's Labyrinth (out next week), which is coming out in both formats simultaneously.
Now, Blu-ray owners routinely criticize New Line's parent company, Warner, for encoding their films for the lower-capacity and lower-bandwidth HD DVD, and porting over the result to Blu-ray, therefore not utilizing the format's full potential. (Notwithstanding the fact that Warner have some of the best encoders in the business.) This approach has been appropriated by New Line as well. This is important for the eventual LOTR encode inasmuch as it will be done by professionals trained to squeeze the maximum out of the available parameters.
Of course, the biggest reason LOTR (and SW) aren't out in hi-def is the format war and its impact on consumer uncertainty when it comes to adoption of the new media. And these kinds of flagship titles just won't be released until the format(s) mature to a certain point. Two things are happening now that might help out: first, both Blu-ray and HD DVD now offer players at under $300, and both now offer interactivity and visual commentary options; and second, it is being rumored that Warner (and therefore New Line as well) will choose just one format in the next month or so, thereby tipping the scales to one and dedicating all their efforts to that format. Word on the street is that it will be Blu-ray.
But even if this comes to happen, the format war will continue to rage, and won't reach the saturation point that makes New Line just release LOTR in the next six months. Actually, even if Warner/New Line go exclusively to the Blu side next year, I don't see them releasing LOTR before this time next year -- by which time the format ought to offer 100 gig discs, finally giving the films enough breathing space to truly look stunning in high definition.
Sorry for the short answer, I'm very busy at the moment.