Ivan Campo skippered a young Town side as Blues went down to the Hornets at the training ground.
The former Spanish international played the 90 minutes alongside a team that was full of teenagers, with Paul Watson on target for Blues.
Ed Upson and Jordan Rhodes both went close in the first-half before Watford took the lead just after the break, Michael Bryan finishing off a solo run with a deflected shot that beat Tom Ross in the Town goal.
Watford doubled their lead on 65 minutes with Liam Henderson finishing from close range following a move down the right.
Town were back in the game three minutes later, Connor Wickham, on as a substitute for Reggie Lambe, headed goalwards from a corner and Watson forced the ball over the line following a scramble.
Ronan Murray tested the Watford 'keeper with his first touch after replacing Rhodes 15 minutes from time but the Hornets held on to take the points.