American Management Systems Inc., which told its shareholders in 1979 that it expected to collect $3 million in a lawsuit and counted on that anticipated income to report a profit that year, yesterday settled the lawsuit under terms that require AMS to pay $700,000.

The lawsuit pitted AMS against Delphi Associates Inc., a subsidiary of Arthur D. Little Inc. AMS sued Delphi in Boston in 1979, seeking $4.1 million for work done as a subcontractor on a state of Illinois project. Delphi, the prime contractor, countersued for nearly $7 million.

Yesterday AMS said the two parties had reached a negotiated settlement under which AMS will pay $700,000 to Delphi when the two suits are formally dismissed.

AMS suffered a setback last October when a U.S. magistrate ruled against it on several motions in the lawsuit. That ruling prompted AMS to establish a $3 million reserve for a possible write-off.

That preliminary decision, AMS said yesterday, "would have made it less likely than previously believed that AMS would have recovered on its claims, and more likely than previously believed that Delphi might recover on its counterclaims."

The company said the settlement would reduce its fourth quarter earnings before taxes by $700,000 and income after tax by $359,000 or 22 cents a share. The company did not say what its fourth quarter earnings would be or whether the quarter would end with a profit.

AMS also said that it wrote off in the third quarter $3.007 million in accounts the company had previously counted as receivable and had recorded in previous years.

Precisely how the lawsuit settlement and third-quarter write-off will affect AMS's earnings for the year could not be determined yesterday. Company officials could not be reached for comment.

AMS, an Arlington-based computer systems firm started in 1970, helped set up financial management systems for the District of Columbia and New York City during their financial crises.