It was heartbreak for Latics' Neil Etheridge as his penalty was placed over the bar and North End goalkeeper Thorsten Stuckmann scored the decisive penalty to put the Lilywhites into the next round.
In normal time, Latics trailed at the break through a Scott Laird header but three changes at the break shifted the pressure onto Preston and Latics capitalised.
Dominic Poleon and Danny Philliskirk fired Latics ahead but ten minutes from time, Tom Clarke poked home at the back post to seal the penalty shootout.
Preston started the better of the two sides and were unlucky not to take the lead two minutes into the game.
Former Bolton Wanderers striker Kevin Davies headed the ball into the path of Kyel Reid but the winger shot over from 18 yards.
Two minutes later, debutant Etheridge was forced into a smart save as Jermaine Beckford turned Timothee Dieng on the edge of the box but the Filipino collected at the second attempt.
Latics were struggling to get out of their own half and 12 minutes into the game, James Wilson brought down Reid on the edge of the box and the winger picked himself up and narrowly shot over the crossbar.
The home side started to come back into the game with Mike Jones going close mid way through the half. The midfielder whipped a free kick into the box which exceeded everyone but fell just wide of the goal.
Latics were threatening and Poleon, Jones and Joesph Mills combined well on the left-hand side but the latter shot wide from the edge of the box.
They would rue that chance on the half hour mark as North End took the lead. Tom Clarke delivered an inch-perfect cross on to the head of the onrushing Laird and he powered home from ten yards to give the visitors the lead.
The visitors were enjoying a lot more possession than Latics and forcing the home side into errors.
Athletic threw caution to the wind and made a treble change at the half time break. Carl Winchester, Michael Tidser and James Dayton were all sacrificed and it proved to be a positive change for Latics as they found an equaliser.
It took Athletic all of 46 seconds to find that leveller and it was Poleon that finished it off. Jonathan Forte picked out the onrushing striker in the area and he fired confidently past Thorsten Stuckmann to give Latics a dream start to the second half.
The home side were in the ascendancy and only two minutes later, left back Mills fired from 30 yards out but Stuckmann managed to get something on it. The rebound fell into the path of Poleon but his snapshot volleyed just wide of the post.
For all Athletic's pressure, Preston almost caught them on the break. Davies rose highest from Laird's free kick into the box but his header struck the outside of the post and away from danger.
The second half pressure from the home side was rewarded on the hour mark as Latics took the lead. Forte's hold up play in the box saw him feed Philliskirk. He beat his his man and stroked the ball past the goalkeeper to send the fans into a state of delirium.
A minute after the goal, goalkeeper Etheridge pulled off a world-class save to keep the home side in the lead. Laird's cross into the box found the head of Beckford and as the ball was destined for the back of the net, the goalkeeper's fingertips kept the home side ahead.
The visitors almost found an equaliser with 20 minutes remaining in calamity style. Genserix Kusunga slid in to clear but the ball ricocheted off Laird and almost found the back post but the ball went wide.
The Lilywhites did find a leveller on 81 minutes through Clarke. Latics failed to deal with a free kick into the centre and the defender prodded home from close range to bring the scores level.
As penalties loomed, both sides went in search of a winner but could not muster a clear cut goalscoring opportunity.
Deep into additional time, Davies received the ball inside the area and with a clear sight of goal shot wide from eight yards out.
That was the last chance of the game as the tie would be settled by a penalty shootout.
After Philliskirk and Liam Kelly had put Latics 2-1 ahead on penalties, Davies saw his spot kick saved by Etheridge but from the next kick, Jones had his saved.
16 perfect penalties followed until the goalkeepers had to step up and it turned out to be heartbreak for Latics' stopper as he ballooned his spot kick over the bar and Preston goalkeeper Stuckmann smashed the winning penalty to win the game for visitors.
Oldham Athletic: Etheridge, Kusunga, Dieng, J.Wilson, Mills, Dayton (Forte 46'), Jones, Winchester (Kelly 46'), Tidser, Philliskirk, Poleon.
Subs not used: Rachubka, Mellor, B.Wilson.
Preston North End: Stuckmann, Laird, Wiseman, Clarke (Buchanan 86'), Davies, Beckford, Reid, Welsh, King (Kilkenny 62'), Huntington, Brownhill (Hayhurst 62').
Subs not used: Jones, Ryan.
Goals: Oldham Athletic (Poleon 46', Philliskirk 59') 2-2 Preston North End (Laird 32', Clarke 81')
Attendance: 3,056 (636 visiting supporters)