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From The Encyclopedia of Arda:

Right at the start of the film we see a somewhat simplified story of the battle that sees Isildur win the Ring from Sauron. In the original story, the battle takes place outside Mordor, and Sauron' s forces are defeated. There follows a seven-year siege of Sauron in his Dark Tower. Eventually, Sauron is overcome not by Isildur himself, but by his father Elendil and the Elvenking Gil-galad, who are both slain. Isildur then cuts the Ring from Sauron's body.
As you'd expect, time and space are generally rather compressed in the film. For example, in an early scene Gandalf leaves Frodo for Minas Tirith, reads the Scroll of Isildur, and in no time at all we see him back at Bag End. If you didn' t know better, you might easily imagine that Minas Tirith was just round the corner from the Shire! In fact, the city is 1,100 miles from Bag End by road. Between the first scene in Bag End and the next, a period of seventeen years passed, and Gandalf did far more in this time than just read a Scroll!
One of the oddest changes from the book is that Sauron doesn' t have a body; Saruman tells Gandalf that he isn' t yet able to 'take physical form'. It' s hard to see how this could be true - what use would the Ring be to Sauron, if he didn't have a finger to wear it on? The book makes it very clear that he does have a physical form - 'He has only four [fingers] on the Black Hand, but they are enough', says Gollum in The Two Towers, and this is confirmed explicitly by Tolkien among his letters. Actually, this does seem to be a misinterpretation rather than a deliberate change, because Peter Jackson has himself described Sauron in at least one interview as being no more than a floating eyeball.
In the film, we see the four Hobbits escape across the Brandywine at Bucklebury Ferry on a dark night. In the next scene, still in the dark, they knock on the gates of Bree. Despite appearances, though, Bree is not just across the Brandywine river - it' s seventy-five miles away. The book takes four chapters to describe the Hobbits' adventures on the journey, including a trip through the Old Forest, a meeting with the mysterious Tom Bombadil and a very close shave indeed among the Barrow-downs.
Moving straight from the Ferry to Bree introduces an awkward inconsistency, because it was during their adventures in the Barrow-downs that the Hobbits acquired their weapons. To fill this gap, we have Aragorn producing a satchel of short swords on Amon S�l, though the film doesn' t attempt to explain how he got his hands on this convenient selection of hobbit-sized weaponry.
Arwen' s role has been greatly expanded in the film. In the book, Aragorn and the Hobbits are aided by a golden-haired Elf named Glorfindel, not by Arwen, and the flood that saves Frodo from the Black Riders is the work of Elrond and Gandalf.
The film tells us that Aragorn has renounced his Kingship, but in the book he does no such thing. He is acknowledged leader of his people, the Northern D�nedain, and by virtue of being Isildur' s Heir has the right to claim the throne of Gondor. That he hasn' t done so yet doesn' t mean he doesn' t intend to.
In the book, there are not two but three Wizards; the third, Radagast the Brown, has been removed from the film. He plays only a small part in the story, but he' s important in that he unknowingly arranges for Gandalf' s escape from Orthanc by sending the Eagle Gwaihir. With no Radagast in the film, Gandalf has to arrange his own escape, by sending a message to Gwaihir by moth.
In the book, when the Fellowship attempt the Redhorn Pass, they are most likely beaten back by the ill will of Caradhras itself, or just possibly through the power of Sauron; the film shows Saruman causing their difficulties instead.
In the book, Saruman bred Men and Orcs to create creatures known as Half-orcs or Goblin-men, and this has led some to associate him with the origins of the Uruk-hai too. The original Uruks were full Orcs of a particularly powerful and deadly kind, and originated in Mordor about five hundred years before the story begins. The film chooses to make Saruman their creator, but it isn' t clear whether this is intentional departure from the book, or a simple mistake.
Lurtz, the Uruk chieftain who shoots Boromir and is in turn slain by Aragorn, is entirely an invention of the film-makers. No such character appears anywhere in the book. He does seem to be quite compatible with the story, though. In fact, if the film version of the The Two Towers follows the book of the same name, we' ll see his Orc-band arguing and fighting among themselves, which would make sense if they' d lost their leader in battle.