Melt 1/4 cup butter in heavy medium saucepan over low heat. Whisk in 1/4 cup flour and stir 3 minutes. Whisk in milk and bring to boil. Reduce heat and simmer 5 minutes, stirring occasionally. Season with salt and pepper.
Melt 3 tablespoons butter in heavy medium skillet over medium-low heat. Add shallots and cook until softened, stirring occasionally, about 5 minutes. Add mushrooms, increase heat and cook until all liquid evaporates, stirring occasionally, about 10 minutes. Season with salt and pepper. Stir mushroom mixture into sauce. Cool.
Heat skillet over medium-high heat. Add oysters and toss 2 minutes. Cool.
Heat oil to 425 deg. in deep fryer or heavy large saucepan. Beat eggs to blend with 1 tablespoon vegetable oil. Pack sauce around each oyster, forming cigar shape. Dredge in flour, shaking off excess. Dip in egg mixture. Roll in bread crumbs. Fry in batches until golden brown, about 4 minutes. Remove using slotted spoon and drain on paper towels. Arrange croquettes on platter. Garnish with watercress and lemon.