Schalke boss Jens Keller admitted a number of his players were substandard as they exited the DFB-Pokal to third-tier side Dynamo Dresden.
Schalke, who finished third in the Bundesliga last season, lost 2-1 in the biggest upset of the German cup's first round.
Dynamo, who have not played in the top flight for nearly two decades, took the lead with a 23rd-minute Justin Eilers penalty and doubled their advantage five minutes into the second half when right-back Nils Teixeira hammered a cross past goalkeeper Ralf Fahrmann.
Joel Matip headed home late on to give Schalke hope, but they succumbed to a defeat that raises questions ahead of their Bundesliga opener away to Hannover this weekend.
"Overall, we played too slowly and gave the ball away too easily," Keller told reporters after the match. "We didn't play enough football to break our opponents down.
"I said again at half-time that we needed to be more urgent in our approach and look to shoot. It was a little better after the interval but, at the end of the day, too many mistakes crept in. The second goal came at a point when we had just gotten ourselves into the game more."
He added: "The result is very disappointing for me. We simply weren't forceful enough over the 90 minutes in order to leave the pitch as winners. Four or five players in our team didn't play to their normal levels today. We will review that."
Schalke had left World Cup winners Benedikt Howedes and Julian Draxler out of their starting XI but included a number of high-profile players, including Kevin-Prince Boateng and Klaas-Jan Huntelaar.
"It's annoying to go out at this stage as a Bundesliga side," Huntelaar said in a post-match interview with German network ARD. "We can't be conceding goals the way we did and we failed to score goals ourselves."
Schalke sporting executive Horst Heldt, who recently said his side should be looking to challenge for the title if Bayern Munich slip up, told Sky Deutschland the result was a "huge disappointment."
He added: "We need to digest it now, and prepare for Hannover. It's clear that the atmosphere won't become more relaxed now. We wanted to go far, and now we have been eliminated in the first round. That's more than annoying."