In August 1986, producer Lawrence Gordon acquired the film rights to Watchmen for 20th Century Fox, with producer Joel Silver working on the film.[34] Fox asked author Alan Moore to write a screenplay based on his story,[35] but when Moore declined the studio enlisted screenwriter Sam Hamm. On September 9, 1988, Hamm turned in his first draft, but said that condensing a 338-page, nine-panel-a-page comic book into a 128-page script was arduous. He took the liberty of re-writing Watchmen's complicated ending into a "more manageable" conclusion involving an assassination and a time paradox.[35] Fox put the film into turnaround in 1991, and Gordon set up the project at a new company, Largo International, with Fox distributing the film. Although Largo closed three years later, Fox was promised that they would be involved if the project was revived.[36]
Gordon and Silver moved the project to Warner Bros., where Terry Gilliam was attached to direct. Unsatisfied with how Hamm's script fleshed out the characters, Gilliam brought in Charles McKeown to rewrite it. The second draft, which was credited to Gilliam, Warren Skaaren, and Hamm rather than McKeown, used the character Rorschach's diary as a voice-over, and restored scenes from the comic book that Hamm had removed.[35] According to Watchmen artist Dave Gibbons, Silver wanted to cast Arnold Schwarzenegger as Dr. Manhattan.[37] Filming was to take place at Pinewood Studios.[38] Because both Gilliam and Silver's previous films, The Adventures of Baron Munchausen and Die Hard 2 respectively, went over budget, they were only able to raise $25 million for the film – a quarter of the necessary budget.[35] As a result, Gilliam abandoned the project, and ultimately decided that Watchmen was unfilmable. Gilliam explained, "Reducing [the story] to a two or two-and-a-half hour film [...] seemed to me to take away the essence of what Watchmen is about."[39] When Warner Bros. dropped the project, Gordon invited Gilliam back to helm the film independently. The director again declined, believing that the comic book would be better directed as a five-hour miniseries.[40]