The defeat came as a major blow to Graham, who regarded the indifference of other managers to the competition as offering a potential opportunity for his own side to take their first steps on the road towards a successful era.
But after watching goals from David Wetherall and Lee Bowyer seemingly set Leeds on course for the quarter-finals, he saw his plans demolished as Reading mounted an impressive comeback.
Graham admits that were he still at Arsenal, he might have dismissed the result as one of minor significance. At Leeds, however, his priorities are by necessity somewhat different. "Success in one competition can breed success in another and give us the confidence to join the big boys around the top of the Premiership," he said.
But Reading, leaning heavily on the experience of their 35-year-old player- coach, Ray Houghton, robbed Leeds of their ambitions with a splendid performance driven from the outset by a positive approach.
Playing with three up front, Reading led after eight minutes, Morley flicking Phil Parkinson's long ball into the path of Carl Asaba, whose confident finish prompted recollections of the difficulty with which Leeds beat the same opponents to reach the semi-finals two years ago.
Last night's response, by contrast, was swift and decisive. After David Hopkin, making room for himself on the left, had struck the underside of the crossbar with a fierce drive, some ineffective marking by the visitors allowed Wetherall to head home Lee Bowyer's corner.
Rod Wallace, sent clear by Hopkin's nicely judged pass, and Bruno Ribeiro, arriving at the far post to meet a low Wallace cross, squandered chances before half-time, but these seemed unimportant when Leeds went ahead on a break from defence early in the second period.
Lee Bowyer, scorer of the winning goal in Leeds' dramatic defeat of Derby here 11 days ago, took the plaudits again after a splendidly decisive finish from the edge of the penalty area, but there was credit due also to Jimmy Floyd Hasselbaink for the quality of his assist.
With that, the home crowd clearly expected to see Leeds take control. Instead, Reading recovered to score a second, Martin Williams, earlier foiled by a point-blank save by Nigel Martyn, beat the Leeds keeper with a looping header from a narrow angle after Bowyer had only half cleared Andy Bernal's cross.
Worse was to come with extra time looming when the former West Ham striker Morley, another pushing 36, stooped to head home a Williams cross and embarrass Leeds again.
The Reading manager, Terry Bullivant, the 41-year-old former Fulham, Charlton and Brentford player who has been in charge only since June, said: "There was no point coming here to defend and happily the tactics worked.''
Graham said: "We should have been two or three in front by half-time but in the second half we completely lost the plot. On the second half showing, they deserved to win.''
Leeds United (4-4-2): Martyn; Maybury, Wetherall, Radebe, Robertson; Bowyer, Haland (Molenaar, 75), Hopkin, Ribeiro; Wallace, Hasselbaink (Lilley, 75). Substitute not used: Halle.
Reading (4-3-1-2): Hammond; Bernal, McPherson, Primus, Swales; Houghton, Parkinson, Caskey (Hodges, 89); Morley; Williams, Asaba. Substitutes not used: Lambert, Booty.
Referee: G Barber (Surrey).Reuse content