Goals from Tom Cannon and Sean McAllister weren't enough as Nahum Melvin-Lambert's hat-trick saw the young Blues bow out of the competition.
The Blues nearly went ahead in the 3rd minute. McAllister driving forward only to be denied by a sea of Reading shirts. Everton went ahead one minute later when Cannon latched onto the end of Dobbin's low cross to fire home.
But Reading scored twice just shy of the half-hour mark. Melvin-Lambert was able to poke home the equaliser following a deep free-kick, before completing the turnaround moments later when he bundled over the line from close range.
In the second half, McAllister powered home Dobbin's teasing cross four minutes after the restart to level the scores.
With just 11 minutes remaining, the young Blues could have been ahead. Higgins weaved into the 18-yard area and was able to squeeze his shot through the Reading defence, but agonisingly past the post.
Dobbin had a great chance to edge the young Blues in front with just five minutes remaining. The forward capitalised on a defensive error which sent him through one-on-one, but he was unable to direct his shot past Harvey Collins in the hosts' goal.
As the game entered into extra-time, both teams remained evenly matched. Centre-back Ryan Astley went over in the box, but penalty claims were waved away by the officials.
And despite the visitors' best efforts, it was Reading who grabbed a winner. Melvin-Lambert completed his hat-trick in the second period of extra-time to send the Royals through.
Everton U18s: Leban, Hosie, Lowey (46' Thompson), Hagan, Astley, Hughes, Higgins, Onyango, Cannon, McAllister (87' Whittaker), Dobbin (105' Jon Anderson).
Subs not Used: McIntyre, Kristensen.
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