It was one of the biggest gambles in movie history - handing $300m to shoot an epic trilogy in one go to a virtually unknown director with no record on big-budget Hollywood pictures. And letting him do it 7,000 miles away, so that studio executives had little control over what actually happened on the set.

There were plenty of recent examples of how a huge investment in what seemed like a sure-fire blockbuster had backfired, leaving massive dents in the studio's finances - Waterworld, Heaven's Gate and so on. Somehow, though, Lord of the Rings did get made and having taken $292m so far at the US box office alone, and notched up 13 Oscar nominations, it's easy to forget the scale of the risk involved.

But for Peter Jackson, the film's New Zealand-born director, and his agent, Ken Kamins from ICM, the story behind the Lord of the Rings is one of a project that very nearly failed to see the light of day.

When Jackson and Kamins set out to make the film in 1995, they first had to secure the rights to JRR Tolkien's novels, The Fellowship of the Ring, The Two Towers and The Return of the King. Producer Saul Zaentz had held the rights for the past 30 years and had no intention of selling them.

Up to that point, Jackson was known only for low-budget horror movies such as Braindead. However, an Oscar nomination in 1995 for the screenplay of his $3.5m arthouse drama Heavenly Creatures had earned him a first-look deal with Harvey Weinstein, head of Miramax, the independent studio allied to Disney. So Jackson and Kamins approached Weinstein that year with the idea for a Lord of the Rings adaptation.

"When we told Harvey that Saul held the rights, he was immediately enthusiastic," says Kamins, "as he had just helped Saul on The English Patient [Miramax had stepped in to pick up the film after Fox dropped it on the eve of production]. That created the moral window by which Harvey could ask. But this wasn't charity either. Saul had Harvey pay a pretty penny - I've been told somewhere in the $3m range."

In the nine months that it took Weinstein to wring the rights out of Zaentz, Jackson finished off his latest film, The Frighteners, which, on the basis of a 12-minute trailer that he showed to the film's studio backers at Universal, looked like turning him into a big-name director. Suddenly Jackson was hot and he started to get offers to direct numerous studio projects, including a remake of King Kong for Universal.

But The Frighteners bombed and Jackson was dropped by almost everyone except Weinstein, who had loved Heavenly Creatures. Having secured the Lord of the Rings rights, the Miramax boss sent Jackson and his partner, Fran Walsh, off to write the scripts for a two-parter to be shot back-to-back, and to begin production research in New Zealand.

Just when things seemed to be going smoothly, however, the next wave of problems started. "It soon became clear to Miramax that it was going to be a very expensive proposition," says Kamins, "maybe more expensive than their brief as defined by Disney allowed them to get involved in.

"Harvey then went to Disney and asked whether they would want to be a partner on the project. When Disney said no, Miramax got concerned about the cost. And of course [started] asking the obvious question: what happens if the first movie doesn't work?"

Faced with such a risky, expensive project, Weinstein asked Jackson to make the trilogy as one film of no more than three hours. Jackson declined, and instead, he and Kamins asked to take the project to another studio. Weinstein agreed, although he imposed very tough conditions. Says Kamins: "We had three weeks to set it up somewhere else. Harvey also demanded that the $12m that Miramax had already spent in development had to be repaid within 72 hours of the agreement being signed.

"Now this is highly unusual in the movie business. Normally a studio would simply pay the former studio a 10 per cent option or they would work it out in the budget of the film once the movie got made.

"He also insisted that he and his brother Bob would share executive producer credits, no matter who made the film. Most importantly, he and Bob insisted on 5 per cent of the gross, whether there was one movie, two movies or eight."

With three weeks to find another studio, Jackson and Kamins decided to do two things. While Kamins started submitting the screenplays for a two-part adaptation to every studio in Hollywood, Jackson flew to New Zealand to produce a 35-minute documentary with $50,000 of his own money.

The idea was that if any of the studios decided that they were interested, the documentary would show them where Miramax's $12m had gone, and, most importantly, why Jackson was the right director.

But Kamins had little success - every studio passed except two, Polygram and New Line, owned by Warner Bros. "So in August 1998 Peter and I met Polygram in the morning and New Line in the afternoon. Polygram's Stewart Till [see interview, page 8] was enamoured by the project." But by the time of the meeting, Universal was already in talks to buy Polygram, and straight after the meeting Kamins and Jackson were told it would be unable to proceed.

"So we went on to New Line with us realising that they were the last Popsicle stand in the desert, and them not knowing that," says Kamins.

But at New Line Jackson had an old friend in Mark Ordesky, president of Fine Line, the arthouse division, and an exec producer of the trilogy. "I had a huge advantage over everyone else in Hollywood in that I had known Peter as a filmmaker and a friend for over 10 years," says Ordesky. "New Line hired Peter in 1989 to write an instalment of Nightmare on Elm Street that was never produced. During that, he was sleeping on my couch. So I was able to say: this is someone who you can believe what he says."

Jackson made his presentation, and New Line Cinema's co-chairman Bob Shaye was impressed. But he had a question. Says Kamins: "He asked 'Why are you making two movies? It's three books, so it's three movies'." Negotiations started the next day.

The revelation that New Line had upped the ante still further by proposing three parts rather than two seems extraordinary, and according to Ordesky many in the business doubted the sanity of this decision.

"But Peter's presentation made it clear that he had an absolutely commanding vision for the film. This was not something that was being done on the fly. You would be surprised how, in the movie business, some of those commitments are made on far less sturdy ground." Nevertheless, Kamins is "not sure that had AOL acquired Time-Warner before this that they would have been as supportive".

Four years later, however, AOL Time-Warner looks like having one of the biggest money-spinners in entertainment history on its hands. New Line and its distribution partners have turned Lord of the Rings into a worldwide franchise in the Star Wars mould, and are exploiting the property across a huge range of platforms - DVD, video games, the internet, merchandise of every sort. The gamble is starting to pay.

katjahofmann@compuserve.com