An Interesting Puzzle

I came across an interesting puzzle today. I was arguing with my friend Andy about this problem after school (where we also came up with it).

Here's my side of the problem. 'Earlier' also means 'before', right? Say my watch said the time was 7:35PM, and the actual time of the world is 7:45PM. Is my watch not earlier? If you think about it some more, there's another side to this problem.