They failed to force Boro goalkeeper Jason Steele into a single difficult save, and were comprehensively outplayed by Championship opposition.
"This was an opportunity for us to try to get into the quarter-finals, but we didn't play well enough and we didn't deserve to go through" said O'Neill.
"It's really disappointing. We started off brightly in the game and looked as if we were bright, but that didn't last long enough. Middlesbrough forced their way into the game and got the goal in front and in truth, we didn't create enough clear-cut chances to warrant a victory. It was a really disappointing evening."
Sunderland looked devoid of a cutting edge throughout, with Steven Fletcher starved of service and both Adam Johnson and Stephane Sessegnon continuing their disappointing starts to the campaign. By the closing stages, any lingering cohesion had drained from the Black Cats' players, but O'Neill disputes that a lack of confidence is a deep-rooted concern.
"Eventually, we didn't have enough confidence, but that wasn't the case at the start of the game." he said.
"On the back of a strong draw at Stoke, there was no reason for us not to be going into the game with no confidence. I actually think it was quite opposite. But if you're not playing well enough, confidence can drain. You start choosing the wrong options and eventually misplace a couple of passes. You feel it more than if things were flowing pretty well. Collectively, we just weren't good enough to go through and that's very disappointing indeed."
A lack of goals is clearly a major worry though, with Sunderland having scored just ten goals in their 11 games in all competitions this season. Fletcher remains their only goalscorer in the league, and the Wearsiders never really looked like scoring last night, a situation that was a repeat of their impotent display at Stoke's Britannia Stadium last weekend.
"We have to do more to get goals." admitted O'Neill.
"We have to look dangerous, and when we get the ball in and around the penalty area, we can't pass the buck and we can't lose it in a good position. There must have been six occasions I can easily recall when we had the ball in really good positions in and around the penalty area and either overrun it or misjudged the next pass through. That's disheartening and we have to do better."
The boos that echoed around the Stadium of Light at the interval were even more pronounced at full-time, but O'Neill expressed sympathy with Sunderland's unsatisfied supporters.
"I accept it and I feel that it was merited" he said.
"The fans are disappointed and rightly so. That's part of the game and we have to face up to it. We have to pick ourselves up and go about our business."