Stephen Hunt whipped in a corner which was contested by Noel Hunt and Eustace at the near post.
The ball bounced over the line - four yards wide of the goal - before being hooked back into play by Noel Hunt.
Reading's Andre Bikey headed back towards goal, where keeper Scott Loach made a save, but the linesman had already flagged - for a goal.
And referee Stuart Attwell gave the goal to total bemusement around the stadium.
Watford boss Aidy Boothroyd on Reading's opening goal: "I've never seen anything like it. It's like a UFO landing, a mistake like that.
"I've been to see the referee and, in fairness, he's only going on what the linesman says.
"He's working in a team and, if someone comes in his ear telling him it's a goal, I suppose he's got to give it."
Boothroyd on whether Reading, who knew they had not scored, should have allowed Watford to score an equaliser: "I don't expect players to take things into their own hands. It's not up to them.
"If someone stops you in a car park and gives you a present you don't say no do you?"
Reading boss Steve Coppell on his side's controversial opener: "When the whistle went I wondered what it was for as I could not see a foul.
"Everyone trooped back to the centre and then it became obvious that the referee had given the goal.
"But after speaking to Noel Hunt after the game it became clear that the ball went out of play wide of the goal.
"The game is crying out for video evidence and it has been for a long time.
"It's obvious. Rugby League puts us to shame with how referees can call for replays."
Coppell on whether his side should have allowed Watford to score an equaliser: "Let's get this clear. The responsibility is not with the opposition to right a wrong. It is up to the officials to get it as right as they can.
"It's like cricket, do you walk or not if you've nicked one behind? As a renowned opening batsman I used to walk but it's a hypothetical question.
"If the referee had come and told me at half-time that they'd cocked it up I don't know whether I would have let them score."
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