Actually, while it was indeed filmed actors and sets, very little of the film was not digitally retouched. From making the hobbits small, to the fantastic landscapes/locations, to the multitudes of monsters that weren't painted guys, to the completely computer generated scenes like the party running out of Moria. (That last one really, really sucked.)
The excessive bad CGI work was one of the things I really hated about the film.
One of the scenes that sticks out was the boats going past the pillars of the kings. They show the statues, great. Then they show a close up. Then they show a fly-by. Then they show a closeup fly-by. It was like the CG crew was like, "well we built 'em, lets use up some feet of film."
They really could have shortened the film by at least half an hour. I'll give them credit though, the movie wasn't nearly as long and tedious as the book.