The characters and the mood are excellent: The Comedian, Dr, Manhattan and Rohrschach especially.
There is a good comic-book feel, and the use of music manages to capture a lot of essence of the original.
The direction--in flashes--is grimly inspired.
It fails, however, for three reasons.
1) The ending limps, especially the fight scenes between Ozymandias, Night Owl, and Rorhschach, as well as the overdone moralizing by Night Owl. The last really good moment is when Night Owl and Rohrschach get out of Archie and head for the Antarctic Karnak.
2) It's too long as a movie and too short for an HBO mini-series, which it really should have been. The length made me ... tired. But on the other hand the brevity left out a lot of what made the series so important: in the graphic novel, context was equally important as plot. The minor characters (like the psychiatrist or the pair at the newsstand) are critical to understanding the world of the Watchmen. Here they become almost inside jokes: if you haven't read the book, you have no idea who they really are, or why they are wandering around.
3) The sex and the violence are not gratuitous, just ... bland. I couldn't care when Night Owl and Silk Spectre hooked up. And the splashing blood, gunshot wounds, and flying bodies just became more special effects rather than shocking (or even necessary) during the movie's second hour. By the opening of the third hour, I didn't connect at all. (I will give them credit for doing justice to Rohrschach in prison, even though they changed the attack on his cell somewhat.)
As I said before: it should have been an HBO mini-series, with 90-monute episodes each corresponding to one chapter of the original. That would have worked (and we might have gotten the real fake alien attack on New York).
But then again, maybe the world of The Watchmen is like Discworld (which didn't translate too well in the BBC attempt at Hogfather): not meant to be removed from its original media.
I don't regret having seen it, but now I realize why my son complains about the short-cuts and liberties taken in the Harry Potter films.