Zola has praised Palace for their spirited effort, but insisted that his side are still firmly in the race for automatic promotion this season.
"After the first half we were not expecting anything like that," said the Italian.
"They played really well and caused us a lot of problems and we did not have the same freshness in our legs. And Phillips certainly made a difference.
"But there are 15 games to go and I don't want to be second now, I want to be second at the end of the season. It's going to be a race to the end."
Watford currently sit in third place in the Championship.