Ok, got it working...sorta. I could get it to run if I set
PHP Code:
 $RecurseLevel 
I then changed the
PHP Code:
$CheckFolder = array(DIR_FS_CATALOG 'includes/'DIR_FS_ADMIN); 
and then did this:
PHP Code:
$fw->excludeFiles( array('./images/''./bmz_cache/') ); 
and increased the $RecurseLevel and it worked.

You were right, on the permissions for the snapshot_filewatch.txt file being world writable. Directories in my case are 755... (I might re-test this as I never modified the script to enforce 755 instead of 777...)

I think having about 100,000 images chokes the script/server....