Liverpool's Under 18 side, in it's first season coached by Steven Gerrard, have suffered extra time heartbreak at Anfield.
Tyreece John-Jules scored Arsenal's winner in extra time in front of the crowd at Liverpool's home.
All eleven of the Liverpool side were making their very first appearance on the Anfield turf, not to mention Steven Gerrard sitting in the managers seat for the first time at the stadium.
LFC U18s: Jaros, N. Williams, Lewis, R. Williams, Boyes, Clayton, Tagseth, Dixon-Bonner, Millar, Jones, Camacho.
Substitutes: Glennon, Atherton, Sharif, Larouci, McAuley.
Arsenal's Robbie Burton put the away side in the lead after just 16 minutes when his deflected shot from the edge of the box beat Liverpool keeper Vitezslav Jaros.
But Liverpool's young starlet, Curtis Jones, levelled the scores just a couple of minutes before half time.
And it was Jones who gave Liverpool a 2-1 lead just a few minutes into the second half - this time he was the beneficiary of a deflection past the Arsenal keeper.
The reds saw a goal disallowed shortly after but with 5 minutes of the cup tie remaining Arsenal sub Saka fired in an equaliser after a good period for the away side.
It knocked the wind out of Liverpool's sails and in extra time it was Arsenal who looked the better value for a winner, which they collected midway through the first period.
Liverpool can concentrate back on the U18's Premier League now. The reds are 1 point behind leaders Manchester United but have a game in hand in the North division.