There was outrage at the White House when the INS approved new visas for Mohamed Atta and Marwan al-Shehhi six months after the World Trade Center attacks.
A Justice Department probe has found that the two men's visas should have been refused in any case, because they left the US while their applications were pending.
A new system for tracking foreign students is due to be in place by January next year - but the report says the deadline won't be met.
'Stunned'
President George W Bush said he was "stunned" when the Florida flight school where two men received training was told their visas would be extended.
The report says that INS procedures were "untimely and significantly flawed", although there is no suggestion that the INS could have identified Atta and al-Shehhi as potential suspects.
But even after the terror attacks, their already backlogged applications continued to be processed.
"No one thought to even inquire" where the paperwork was, the report says. "This was a widespread failure on the part of many individuals."
Status change
The two men had applied to change their tourist visas into student visas in September 2000, after they had enrolled on a professional pilots' course at Huffman Aviation in Venice, Florida.
But the INS was so slow that no decision had been taken when they finished the course at the end of that year.
Both men left and re-entered the US twice in the first half of 2001, which should have invalidated their student visa requests.
But instead their applications were approved in July and August, six months after their studies had finished, and weeks before the World Trade Center attacks.
It took an INS contractor until March 2002 to send out the notification of approval to their former flight school.
The INS blamed a backlog of paperwork at a processing centre in Kentucky for the delay in dispatching the letters.
"The INS's prevailing philosophy in dealing with foreign students... before 11 September was that students were not a concern or a significant risk worthy of special scrutiny," the report said.