Watson was touched off by dark horse Sean Alexander of Colinton Mains in a 21-19 thriller at Gorgie Mills.
Alexander lead 10-6 then 15-10 but Watson did take on the look of a winner with a 4, 3 rally to cross 17-15 then, at 18-17, he held three shots for game.
However, a dramatic 20th end saw Alexander crash the jack out of play with a fierce strike then card three shots on the replay to stand 20-18 up. Watson won a single to 19 but Alexander had his measure on end 22 and edged the winning single to 21.
The ambition of Scott Noble of Pilrig was to go one step further than his defeat by Watson in the 2010 final, however, that dream was shattered by Stuart Hogarth of Sighthill who defeated him 21-9 at Mayfield.
Daniel Gormley is currently setting the heather on fire with E&L in the Hamilton Trophy but the Craigentinny star suffered a nightmare at Wardie where he crashed to a 21-5 defeat in 13 ends from Kerr McKail of Summerside.
Danny McKendrick of Bainfield continues to live the dream with the 20-year-old conqueror of title favourite Josh Spalding beating Dean McNeil of Balerno 21-15 after a 26-end battle at Colinton.
Meanwhile, in the Coronation Fours at Mayfield, Tanfield progressed with Robert White conjuring up a magic 2, 5 finish to skip Paul White, Peter Findlay and Graeme Swan to a 19-12 win over Postal.
And, in the Scotmid sponsored Water of Leith 1st Sixteens League, defending champions Carrick Knowe served up a cracking performance to win 4-1 away to Sighthill. James Hogg finished with a 3 to pip Jamie Gracie 15-14, Richard Tough beat Alan Trotter 15-13; Colin Mitchell beat John McDermott 18-12 and Darren Hush lost to Jason Ronaldson 11-18.
Other results: Balerno 3 Colinton 2; Currie 1½ Juniper Green 3½; Gorgie Mills 4½ Beechwood ½; Slateford 1 Bainfield 4.
n DUDLEY host the District 11 semi-finals of the Pairs and Triples discipline tonight featuring, Pilrig v Goldenacre and Tanfield v Summerside (pairs); Craigentiny v Pilrig; Queensberry v Summerside (triples).