I shan't try to deconstruct it historically. It's not really my period, but from what I've been able to read up it is rather more true to history than Gladiator. You can find a discussion of the film in relation to history here. I do think Ridley Scott has actually been quite clever. By choosing an event, Saladin's capture of Jerusalem, that most people know happened, yet which few people know any details about, he is able to capitalize on familiarity with some of the characters (Saladin in particular), whilst being able to heavily fictionalize without most of his audience being able to catch him at it - take, for instance, the central character, Balian of Ibelin, a combination of the real Balian and his brother Baldwin, neither of whom were blacksmiths, or indeed French. Scott ends his film where most treatments of the Third Crusade would begin, with Richard Coeur de Lion's departure for the Holy Land.
The Crusades setting gives Scott a useful device with which to critique twentieth and twenty-first century policy in the Middle East. Not for nothing is there a line in the script about newcomers from Europe disrupting the attempts of those Franks born in the Holy Land to live in peace with the Muslims (it helps that this was actually what was going on).
Unfortunately, the film is dreadfully dull. There are huge swathes in which Nothing Really Happens At All. To compound this, the dialogue is dreadful. For a start, people don't say very much (especially Orlando Bloom). And when they do, they never come out and say what they mean - instead they talk in ellipses. No wonder Orlando Bloom spends much of the movie with a look of blank incomprehension on his face.
The film doesn't really get going until the actual siege of Jerusalem itself. And when it does, it trips itself up, ironically, by being too true to history. Pretty much everything that Balian is depicted as doing in the movie while defending Jerusalem, he actually did (though the Queen, Sybella, was more involved). But in cinematic terms, a big climactic siege scene like this calls out for one of two resolutions, either that of Helm's Deep or the Alamo. In the first, the cavalry (perhaps in the form of Jeremy Irons and his knights) appear at the last moment to drive off the attackers and raise the siege. In the latter, help never comes, and the defenders are slain to a man, giving an air of tragic inevitability to what goes before (while watching the siege scenes, I was thinking of John Julius Norwich's chapter on the fall of Constantinople in A Short History of Byzantium, which never fails to move me). What Kingdom of Heaven gives us is a negotiated settlement, in which Saladin takes the city but lets the people go through. This is pretty much what happened (though Saladin actually demanded a ransom from everyone, and some who were unable to pay it ended up as slaves), and to have done otherwise would have laid Scott open to serious charges of distorting history. It also probably promotes Scott's message, that negotiated settlement is the best way out of conflict. But it leaves the audience dissatisfied. (Further to this, Joe Queenan rightly notes that the audience are deprived of a confrontation between Bloom and the wicked Guy de Lusignan - again, historically accurate, but no 1950s epic would have left the story without a fight to the death between the two.)
In the end, Kingdom of Heaven further demonstrates a point I've made before. As historians, we'd like to see films be as historically accurate as possible. But good history does not necessarily make good cinema.