I think the audience wasn't sure if they SHOULD laugh. The entire situation was so awkward. NOBODY has confronted the president like this, through satire or other means. But as other people have stated, I think the value is in what Colbert said and who he said it in front of, not whether or not it was funny. The NY Times has finally covered this story, but they sorta framed it as, "Was he funny?" My opinion is...well yes, he was funny, but the point is...he just called out the President on all his sh%t, right to his face.
For those of you who suggest Colbert was mild in his speech...I think you need to understand the culture surrounding the President and media right now. The press rarely ask him tough questions, he gets offended if they do. They get called "Liberal" if they ask him anything midly confrontational. Colbert was saying some hardcore stuff if you ask me. My jaw dropped on hearing some of his speech.
Finally, I don't want to start a pissing match on whether or not Bush is a good president, or the worst in history...but why should anyone automatically give a person respect? Respect is earned. This man hasn't done a single thing to earn my respect. Sure, he's the President, but that doesn't entitle him to a free ride.