Interesting.
I had already tried the repairing and setting up as new again (man that takes a while)
I followed your process and got it to work. Just to be sure, before I started, I disabled wifi and bluetooth on my iMac during the process so there wouldn't be any other Apple devices in range that could be seen/heard by my phone/watch. I have an open case with Apple that has been escalated to Engineering so I will update my ticket with this information.
I'm still seeing spotty performance on notifications. I'll also run a test or two with the iMac wifi/bluetooth enabled to see what happens when the iPhone tries handoff to the iMac when receiving a call.
Being a 1st Gen device and early adopter I'm still impressed with the Apple Watch, these speed bumps are bound to happen so its not the end of the world 🙂 My guess is we'll see a software update drop pretty soon if they are able to isolate the issue.