Schoolboy Edward Upson scored a dramatic 118th minute goal to bring the FA Youth Cup to Town for the first time in 30 years. The 15-year-old lashed a loose ball past Southampton keeper Andrew Neil from just outside the area with the goalless second leg appearing destined for penalties.
The Blues, level with the Saints at 2-2 from the first leg, lined-up without midfield general Owen Garvan who was suffering with a virus and a knee injury, winger Danny Haynes coming into the side wide on the left of a midfield five.
Town were also without striker Billy Clarke due to a medial knee ligament injury sustained against Spurs in the semi-final but better news was that full-back Michael Synnott was OK after his knee problem.
Chances were scarce in the first half but Southampton came closest early on when David McGoldrick headed wide after Shane Supple had punched to the edge of the area.
Town were enjoying the better of the possession but Southampton were looking more dangerous on the break. The game's next goal opportunity didn't come until the 26th minute when Saints' Nathan Dyer headed straight at Supple. Soon after Leon Best shot wide.
The Blues had created nothing in the way of chances and just after the half hour Danny Haynes joined Darryl Knights up front.
Best had a shot deflected wide for the Saints before Town skipper Liam Craig broke quickly after a Southampton corner and Darryl Knights shot weakly to keeper McNeil.
The Blues were looking more threatening in the latter stages of the half and a neat interchange between Knights and Haynes ended with the latter blazing a cross-shot over.
McGoldrick forced Supple into a save on 40, before winger Theo Walcott sent a curler just wide of the Town keeper's left post.
The visitors had had the better of the half but the Town defence and Supple had remained solid throughout. The Southampton management had said before the game that they planned to test Supple with a lot of crosses, but the Irish keeper had been more than capable of dealing with everything thrown at him.
Town started the second period strongly and after five minutes Haynes hit a shot on the turn from inside the area which was blocked. The loose ball fell to Knights but his strike was also blocked. From the corner, Southampton repeatedly failed to clear but Liam Trotter failed to make the most of a free header.
Haynes might have put the Blues up on 58 but missed his kick from Cathal Lordan's excellent right-wing cross.
Supple was at the centre of the action a minute later when he saved impressive winger Dyer's second shot from the right, the first having been blocked by a defender.
The Town keeper, without a doubt the man of the match, made his finest contribution in the 63rd minute. Dyer went round the outside of James Krause on the right and crossed for Finn Tim Sparv. The boy-mountain midfielder's first effort was brilliantly stopped by Supple who also got to the same player's headed rebound, plucking the ball from the air just ahead of it crossing the line.
Walcott went high and wide in the 71st minute as Southampton continued to have much the better of the penalty box action. The Blues sought to change that by bringing on striker Charlie Sheringham, the son of former England international Teddy, in place of Danny Haynes.
Seven minutes later, Lloyd James struck a 30 yarder which gave Supple few problems.
The Saints finally had the ball in the net in the 79th minute, the generally quiet Walcott crossing low for Best who tapped home, only to see a linesman's flag had been raised. With eight minutes of normal time remaining, the Blues switched Cathal Lordan for Blair Hammond.
The 90 minutes ended with a flurry of chances, Knights, by now playing in a wide right role, sent in a dangerous cross but Hammond wasn't close enough to get a touch at the far post. For the Saints, Sparv shot wide.
With seconds remaining the Blues almost won it. Knights hit a shot from just inside the area which McNeil saved but couldn't hold on to. Hammond seemed certain to score but the Southampton keeper got across superbly to block his rebound. From the resultant corner, Aidan Collins headed wide.
Referee André Marriner blew the final whistle shortly afterwards, signalling 30 minutes extra-time, perhaps followed by penalties, the Blues' two away goals from the first leg not counting double in this competition.
The first chance of extra-time came in the 97th minute when Supple punched clear ahead of the diminutive Dyer, Leon Best shooting well over from just outside the area.
Dyer, the Saints' most dangerous player on the night, cut in and shot wide on 101, three minutes before the Blues introduced Edward Upson for Liam Trotter.
Town were starting to look stronger as the second half of extra-time began with Michael Synnott hitting a decent effort off a defender and wide from 25 yards.
Knights hit a shot which McNeil saved, prior to James Krause receiving the game's only yellow card for a foul on Dyer wide on the Saints' right. Soon after, Southampton sub Adam Lallana hit a shot which Supple saved.
On 118 Upson won the Cup for the Blues. Skipper Craig had broken down the left but was dispossessed just inside the area, the ball falling loose to Upson who belted the ball into the net from just outside the area, beating the keeper to his right.
The Town players piled on the youngest of all the youngsters in front of the Britannia Stand, the majority of the 14,889 driven wild by the strike so close to the end of such a tense encounter.
Town might have grabbed a second on the break a minute later when Knights fed Sheringham from the right, the sub's effort catching a defender and running kindly for the keeper.
Southampton were given a late lifeline when referee Marriner added on a minute of injury time, but despite a late corner, the Town defence, and in particular the brilliant Chris Casement and Aidan Collins, held out until the final whistle.
Portman Road erupted, the Town players grabbed one another, while Saints collapsed to the floor.
A stage was erected in the centre circle, the Southampton players picking up their loser's medals to generous applause from the Town support.
The Town side were roared onto the platform, injured striker Billy Clarke throwing aside his crutches to join them as captain Liam Craig lifted the FA Youth Cup the Blues had previously won in 1973 and 1975. The Blues' victory is the first time a side from outside the top division has won the trophy since 1991.
A lap of honour followed with Danny Haynes in particular enjoying slapping hands with fans in all corners of the ground.
Players grabbed scarves and flags from fans as they went round the ground, Cathal Lordan finding an Irish tricolour from somewhere and draping himself and some of Town's other Irishman in it. Central defender Chris Casement, second to Supple in the man of the match stakes, took on the traditional task of wearing the Cup's lid on his head.
The goalscorer himself left the Portman Road pitch along with his team-mates looking slightly bewildered after making such a dramatic impact in his FA Youth Cup debut, the name of Edward Upson now written forever in Ipswich Town history.
Town: Supple, Synnott, Krause, Trotter (Upson 104), Collins, Casement, Lordan (Hammond 82), Moore, Knights, Haynes (Sheringham 71), Craig. Unused: Reynolds, Ainsley. Att: 14,889.