United bowed out of the FA Youth Cup at the third round stage after extra-time, despite a courageous performance at the Madesjki Stadium on Tuesday evening.
Connor Hall fired the Blades in front early in the second-half, only for Gabriel Osho to equalise for the hosts in stoppage-time.
In extra-time, goalkeeper Aaron Ramsdale was dismissed for a foul that gave Josh Barrett the chance to score from the spot, before Danny Loader made the tie safe for the home side scoring with the last action of the game.
On a damp night in Berkshire, the first chance came in the 18th minute and it fell to the hosts as Barrett broke down the left before cutting inside and advancing towards goal, only to be denied by an excellent save by Ramsdale.
The home side continued to look threatening with Frost and Barrett the main architects, whilst at the other end Hallam forced Southwood into a save.
Reading continued to press in a bid to open the scoring, but despite enjoying a lot of possession, the Blades kept their shape and defended resolutely when called into action.
Before the interval, Ramsdale was twice needed in consecutive attacks to deny Davis and East respectively, whilst Hallam continued to look dangerous for the visitors.
Despite having to soak up plenty of pressure in the first-half, the Blades were quickly out of the traps in the second period and took the lead in the 51st minute.
HALL, who recently scored a brace in a 2-1 victory over Sheffield Wednesday, latched onto a through ball before keeping his composure to tuck the ball in at the far post.
Reading's response was almost instant as Barrett hit the crossbar with an audacious chip after a corner wasn't cleared properly.
On the hour, after a succession of corners, Barrett again came close, shooting narrowly wide with Ramsdale scurrying across his goal line.
At the other end, Blades skipper Gordon came within inches of doubling United's lead after clipping the woodwork with an effort from the edge of the area following a marauding run at goal.
The Blades continued to defend stubbornly, although Smith was inches away from connecting with Barrett' centre as the Royals chased an equaliser.
With time running out Ramsdale showed his bravery to deny Smith, but inadvertently took a heavy whack for his troubles and required treatment.
As four minutes added time were signalled, with Ramsdale fit to continue, Reading delivered a decisive blow from a corner, with OSHO applying the finishing touch in a crowded penalty area and that was enough to take the tie to extra time.
The start of extra-time saw Reading looking to build on their late equaliser, but Ramsdale showed good hands to collect firstly from Barrett, then from Smith. At the other end, Mallon saw his rasping drive tipped round the post by Southwood.
Substitute Litchfield was next to sting the palms of the Reading goalkeeper as the first-half of extra-time drew to a close with Ramsdale saving from Frost.
With nine minutes remaining, the contest swung massively in the home side's favour as Ramsdale was red carded for a challenge on Smith that saw the referee point to the spot and it was BARRETT who stepped up to send Charlesworth, United's stand-in goalkeeper, the wrong way.
The hosts were now in control and only a last ditched tackle from Cummings prevented Smith advancing through the Blades defence.
But the tie was put beyond Blades with the last kick of the game as LOADER applied the finish to a swift counter attack after United had thrown caution to the wind in search of a leveller.
Blades: Ramsdale, Charlesworth, Kelly, Gilmour, Cummings, Semple, Maw (Smith 68), Gordon, Hall (Ford 81), Hallam (Litchfield 62), Mallon.
Unused: Adebowale, Perryman.