Attorneys with the U.S. Department of Justice have 60 days to appeal the ruling. Legal experts say they are under no legal obligation to appeal and could let the ruling stand.
Phillips declared the law unconstitutional after a two-week trial in federal court.
The case was brought about by the pro-gay Log Cabin Republicans.
In a statement, the group said, "These soldiers, sailors, airmen and Marines sacrifice so much in defense of our nation and our constitution. It is imperative that their constitutional freedoms be protected as well."
Between 1994 and 2009, more than 13,000 troops were discharged for violating the "don't ask, don't tell" act.
Some people in the Southland approved of today's ruling.
"If you want to allow gays, it's OK with me," said Temecula resident Al Dostra. "It doesn't hurt me. They get along."
Others, however, believe the policy should stand, and gay troops should keep their sexual orientation private.
"You have children out there and that they should see that it's not good," said Jade Como of Riverside. "For children to see that openly, that's horrible."
The Associated Press contributed to this report.