An interim report, publicly available this week, reveals that the new management team, led by Glenn Rodger, the director, is making a positive start to a radical overhaul of the education department.
Inspectors say there has been "some encouraging progress" in addressing previous action points but that the extent of work required to bring the department back into line is "still considerable".
Their assessment follows a scathing report in August 2002, which itself followed the authority's financial crisis brought about by mismanagement in the education service. Almost the entire team of senior managers in education was replaced.
HMI says that Mr Rodger, previously a senior officer in Edinburgh, has helped to create a positive climate and raised the confidence of officers and schools. The secondment of two headteachers as acting heads of service helped to improve consultation and trust.
Councillors and officials are now seen by staff and parents as more accessible and responsive, helped by a series of open staff forums and headteacher conferences.
Senior staff are undergoing management and financial training to ensure there is no repeat of the crisis that finally sank the Liberal DemocratIndependent administration in last year's elections.
Regular checks are carried out to ensure that headteachers have not overspent, although "not all primary schools had the ICT systems to provide necessary financial information".
The authority is moving ahead with improved analysis of attainment but still has to introduce a more rigorous system of school review.
"Fundamental decisions about the nature, timing, logistics and resource implications of the review process had not yet been taken," HMI found on its visit last September.
"Overall, at this interim stage, the council had made some encouraging progress on most of the points for action. It was improving communication and establishing the confidence on which further improvements could be built. The new director of education and lifelong learning had made a very positive impact," HMI states.
In their final injunction, inspectors recommend that the council presses on "quickly and decisively to make a positive impact on schools and pupils".