Watford's starting XI at Wembley contained seven loanees, Matej VydraAlmen Abdi, Marco Cassetti and Joel Ekstrand are all on loan from Udinese,Daniel Pudil and Ikechi Anya are on loan from Granada, and Nathaniel Chalobah is on loan from Chelsea. However, a change in Football League rules means that option will not be available next season to a Watford side that is under a transfer embargo until 31 August.
Watford finished third in the Championship, two points ahead of Palace, and would have been promoted had they beaten Leeds on the final day of the season.
Watord boss, Gianfranco Zola, in his first season at Vicarage Road, had built a team largely on loan players, with seven of the XI that started at Wembley only temporarily with the Hornets. He was the first to admit, they were second best on the day.
"They(Palace) played well and probably deserved it more than us, so congratulations to them," said the Italian.
"It is tough for me and tough for all connected to Watford. It hasn't been our best game but to lose to an extra-time penalty is hard to take."
"To be playing here was a big bonus for us, it wasn't expected," added Zola. "Next year we are determined to be stronger and we will be stronger.
"It has been remarkable. We had a lot of fun this year. We are going to make a stronger team. The players we believe are good enough, and if we want them to stay, they stay."
Watford lost 22-goal striker Matej Vydra to injury at half-time, and then needed goalkeeper Manuel Almunia to make a string of saves to send the game into extra-time.
Almunia denied Aaron Wilbraham, Owen Garvan and Stuart O'Keefe to keep it goalless at 90 minutes, only for Manchester United-bound Wilfired Zaha to be fouled by Marco Cassetti in the box and 39-year-old Phillips to score from the spot.
"I had no complains about their penalty," said Zola. "Wilfried Zaha made a huge difference.
"At half-time Vydra had a problem with his ankle and had to come off. They had Zaha who played very well. Games like this can be altered by big players."
The other unknown, is the future of Zola himself. His stock has risen in value since the low points at West Ham and plenty of clubs will be casting an eye his way in the summer.