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Ross Jenkins' side showed heart and fight at the MGroup Stadium, scoring twice against League One club Leicester who compete three divisions above the Hoops.
Boyhood Leicester fan Scott Pollock scored directly from a corner to equalise after Louis Page's 16th-minute screamer.
Two early second half goals scored by Emil Riis and Kamari Doyle gave Russell Martin's side breathing space, before Oxford City captain Josh Ashby gave his side a second.
With not long left, Tommy Watson bagged a fourth to make sure the Foxes avoided a famous potential upset, with the visitors having not been knocked out in the First Round for 103 years.
Leicester began the cup tie well, looking for early control.
After decent defensive contributions from the likes of Josh Ashby and Archie Crowther in the first quarter of an hour, the visitors found a breakthrough in the 16th minute.
Midfielder Page fired a rocket into the top left corner from 30 yards out to put Martin's side ahead.
The Hoops responded well to the setback, giant centre back Ludwig Francillette seeing a header saved from close range.
Luke Thomas saw a shot blocked on the counter attack before Riis put a weak effort at Jonny Maxted.
Winger Ellis Brown began to threaten on the right with some wicked balls into the box, right back Deago Nelson defending well while venturing forward.
The Hoops' breakthrough came in spectacular fashion, Pollock whipping the ball all the way into the net directly from a corner.
Leicester kept up the pressure to see out the half, Brown with another good ball in just before the whistle.
The visitors started the second period with a point to prove, retaking the lead in the 53rd minute as Riis headed home unmarked at close range, Maxted unable to keep the ball out.
They doubled their lead six minutes later, Doyle directing the ball into the bottom corner with the outside of his boot.
But Oxford were not disheartened, captain Ashby lobbing Franco Ravizzoli three minutes later to halve the deficit.
Leicester came again after the Hoops' second, Doyle seeing a shot saved before Samuel Braybrooke arrowed one past the far post.
The hosts' hopes were truly dampened with eight minutes to go, substitute Watson sliding the ball into the bottom right corner from a tight angle to give Leicester a fourth.
The addition of ex-Watford and Sheffield Wednesday striker Fernando Forestieri could not inspire a late surge for the Hoops who bowed out of the historic cup competition with their heads held high.
Hoops: Maxted, Humphries, Ashby, Francillette, Pollock, Tetek (Westendorf 81), Marsh, McEachran (Bateman 68), Brown, Nelson (Forestieri 81), Crowther
Foxes: Ravizzoli, Okoli (Howell 46), Lundstram, Decordova-Reid (Watson 78), O'hora, Riis (Bristic 87), Kangasniemi, Page, Doyle (Aluko 68), Thomas (McFarlane 87), Braybrooke
Bookings: Thomas, Decordova-Reid