The Saddlers’ hopes of Checkatrade Trophy progression were dealt a blow after losing to holders Coventry on penalties.
Zeli Ismail won and converted a spot-kick in normal time to put Walsall in front, only for Marc McNulty to do likewise to equalise for City in the second half.
Jordan Ponticelli put the Sky Blues ahead but Dan Agyei’s stoppage-time goal ensured the match finished level after 90 minutes.
Agyei went from hero to villain after missing in the subsequent shoot-out, and Joe Edwards also saw his penalty saved as Coventry won 4-3 to gain an additional point in Northern Group E.
The result leaves Walsall in second place with four points, while Coventry are third on two points.
Group leaders Shrewsbury qualified for the next round with a 3-0 win over West Brom U21s, who are now out.
The Sky Blues started brightly, although it was the Saddlers who threatened first on six minutes as Zeli Ismail drilled a left-footed shot wide of the near post.
Mark Robins’ men could have taken the lead ten minutes later but Stuart Beavon’s hooked effort was cleared off the line by Kory Roberts.
Walsall were living dangerously and needed another last-ditch intervention to stay on level terms just before the half-hour.
Beavon’s right-wing centre was nodded goalwards by Peter Vincenti but Maz Kouhyar was in the right place to head clear, again off the line.
After surviving those scares, the hosts went ahead against the run of play on 33 minutes.
Ismail was tripped by Vincenti in the box and the Bury loanee dusted himself down to slam home the resulting penalty.
Vincenti almost atoned for his error with a close-range header from Jordan Shipley’s free-kick which Saddlers keeper Liam Roberts spectacularly pushed away.
The ex-Rochdale winger was in the thick of the action again on the cusp of half-time, screwing a 20-yard shot wide after being teed up by Shipley.
A Coventry equaliser finally arrived eight minutes into the second half, Marc McNulty drilling his right-footed spot-kick into the bottom corner after the striker had been felled by Liam Roberts.
And the comeback was complete five minutes later as McNulty raced unopposed onto a ball over the top and squared for substitute Jordan Ponticelli to calmly stroke the ball past Roberts.
The Saddlers had a good chance to level midway through the second half but Sky Blues keeper Liam O’Brien got down smartly to palm away Amadou Bakayoko’s effort from Luke Leahy’s cut-back.
Despite bringing on Joe Edwards and Erhun Oztumer either side of that opportunity, Walsall rarely looked like forcing an equaliser.
But deep in added time, Dan Agyei bundled home a Joe Edwards corner to restore parity and send the match to penalties.
In the shootout, Agyei and Edwards saw their spot-kicks saved by O’Brien as Coventry ran out 4-3 winners.
Team: L Roberts, Devlin, K Roberts, Guthrie, Leahy, Ismail (Oztumer 69’), Flanagan, Kouhyar (Edwards 63’), Morris, Bakayoko, Agyei.
Subs not used: Ganley, Sangha, Shorrock, Mason, Cairns.