The difference lies in the duration and interruption of the actions:
- 'I watched TV when she came' implies that the act of watching TV was completed at the same time or immediately after she arrived, or perhaps the entire viewing happened in a short span around her arrival. It can also suggest that the arrival interrupted the watching, and the watching itself was a completed event.
- 'I was watching TV when she came' clearly indicates that the action of watching TV was in progress (ongoing) when she arrived. Her arrival interrupted or happened during the TV watching.