In Steam/steamapps/team fortess 2 materials.gcf/models/weapons is where you can find all the weapon models. The watches are in v_models since they only appear in first person view. You can decompile them with the fixed MDL Decomplier the same way you do so with player models.

How are they shown to other players then? If they're only v_models?

They're not shown to other players. The spy's watch only appears on him in first person view. Also I didn't say, but you probably already knew: the watch models have the bones with them; you don't link your model to the bones of the class you're making it for when its not cosmetic.

I have a question now, is the arm included in the watch model? As when I open the smd files in blender, they include the arm/watch. It's strange, because the watch model is actually inside the hand, and not attached to the wrist. Is this an import issue, or just how the bones are connected by TF2 afterwards?

I don't know actually. I've never made a watch model to be honest, but I'd be willing to bet that its just how the bones are connected in TF2. Just rig your model to the correct bone in the same place the watch you decompiled is, then hope for the best? Maybe? Good luck.