I hesitated whether to review this one, not because it was a special one-off award (the fact that Hugo created such an award for this book says a lot), but because so much has already been said about Watchmen that I have little to add. It's the Star Wars/Raiders problem yet again (and it'll happen again on Friday too).
To summarize: Watchmen is a revolutionary 12-part comic with story by Alan Moore and art by Dave Gibbons that told a very dark superhero story in which good and evil, right and wrong, are all subjective and the issue of power is explored. Because these people are superior in certain ways, do they have the right to act as vigilantes? Are they above the law? What about their own flaws? It's the 1980s, Richard Nixon is still President (because he won Vietnam with the use of superheroes), superheroes are outlawed, and a violent vigilante named Rorshach is investigating a series of murders that involve superheroes. We also get a series of flashbacks to the '60s that show just how flawed the old "silver age" superheroes were in their private lives. It's all quite intricate and brilliant.
Still, the real genius of Watchmen is not the plot (which gets a bit too intricate - and weird - by the end), it's the use of the medium. For instance, check out this panel-by-panel analysis. There's also a great intercutting of a pirate/horror comic called the "Black Freighter" (In a world with superheroes, other genres dominate the comic racks), which comments on the main story. Most people seem to have missed this point, and the result has been a decades-long imitation of the wrong parts of Watchmen. The ill-advised film adapatation obviously didn't get the message, nor did the non-stop rush of "dark" superheroes that dominated the industry through the '90s and make almost all of the comics from that decade next to unreadable. Watchmen is actually a good example of how a great book can be a bad influence.
Finally, I don't think Watchmen is even close to being Alan Moore's best work. Many fans would cite his earlier run on Swamp Thing or his original work on V for Vendetta, both of which are great. My personal favorite Moore projects came in the late '90s early '00s in two ambitious projects: From Hell is a retelling of Jack the Ripper's murders that is wonderfully researched, features brilliant writing, and has the perfect artist in Eddie Campbell. On the other end, Moore's retro/neo-superhero comics from America's Best really capture his brilliance and what makes the medium of comics so great. Tom Strong was his take on pulp heroes like Doc Savage and the silver age Fantastic Four of Jack Kirby; Promethea is kind of a take on Wonder Woman with elements of Moore's own magical belief system and gorgeous art by J.H. Williams III; Top Ten is a hilarious comic about cops in a city of superheroes; Tomorrow Stories is Moore's take on the old anthology books and shows what a great chameleon he can be; and League of Extraordinary Gentlemen is a steampunk pastiche of Victorian fantasy and horror characters as a superhero team. It was an amazing line of books, all of which are worth a look.