It looks to be an issue with the way the Watch window displays the variables. The variable "fs" is properly defined. No issues appeared until I added the "05 Messages.xls" file. I would just avoid the Watch() function. Show() works in any situation, as far as I can tell.
Names Default to Here( 1 );
dir = "$DOCUMENTS\JMP Scripts\zero test\";
fs = Files in Directory( dir, 1, 1 );
w = Watch( fs );
Show( fs );
//fs = {"0 is smaller than 1", "00five-oh.txt", "0meansinfinity.txt", "Hello World.txt"};

Names Default to Here( 1 );
dir = "$DOCUMENTS\JMP Scripts\zero test\";
fs = Files in Directory( dir, 1, 1 );
w = Watch( fs );
Show( fs );
//fs = {"0 is smaller than 1", "00five-oh.txt", "05 Messages.xls", "0meansinfinity.txt", "Hello World.txt"};
