The report, published by CfBT Education Services, suggests that the Office for Standards in Education is failing in key areas of its remit. Parents are marginalised, the reports are full of jargon and OFSTED is dangerously undermined by appearing politically partisan.
The criticisms come days before next week's annual report from the chief inspector, Chris Woodhead.
For the first time, this will list the "OFSTED Oscars", the best-performing schools in the country. But it is also expected to continue Mr Woodhead's high-profile campaign against incompetent teachers.
OFSTED has recently concluded that there are some 15,000 staff in the state system who, ideally, should be removed. This is an extrapolation from the number of unsatisfactory lessons seen so far.
The CfBT report makes wide-ranging suggestions for improvement, including the abolition of the tight four-year inspection schedule. This, says the author Mike Douse, an educationist who is not associated with CfBT, should be replaced by a 10-year cycle for full inspections backed up with self-evaluation and regular but brief visits.
Mr Douse is particularly critical of the inspections carried out among private schools which, he writes, are often "exercises in mutual admiration". He recommends that the independent schools be subject to visits from OFSTED.
"The only real justification for inspecting every school is if, as a rule, the school's performance is improved as a result," said Neil McIntosh, chief executive of CfBT.
"We believe that inspection can deliver this but accept that considerable changes are needed."
The report says that the inspectorate should be seen as politically independent.
It states: "Very many still believe that OFSTED's inspections are punitive Government exercises against the teaching profession, and the reports little more than vehicles for reinforcing Government dogma. If this remains widespread, their value and validity as useful agents in stimulating the process of growth in schools will be vastly diminished.
"While many OFSTED publications are sound, their potential for influence depends upon OFSTED being ideologically objective and also manifestly appearing so. Currently, the process engenders quite disproportionate anxiety and mistrust."
It says that the location and labelling of failure plays too great a part, at present. Using inspection to manage teacher's quality and performance is wrong, and undermines a school's leadership.
Next month OFSTED will announce plans for identifying the best and worst teachers during inspections.
The author also criticises the way statistics are used in reports which ranges from the "virtually meaningless to the downright misleading".
Parents, says the report, still play little part in the system. "If facilitating parental choice was meant to be the paramount OFSTED objective, then clearly the costly experiment has failed. There is little evidence that the inspection has strengthened anything beyond cosmetic parental involvement. Communicating useful information to parents has been neither the driving force nor the concrete consequence."
It says that the jargon-ridden reports are at odds with the Citizen's Charter and are of little value to parents. Even local newspaper accounts, it says, can be misleading, influenced by unduly positive press releases from the schools.
Of the recommendation that OFSTED inspect independent schools, the report says: "The peripheral and peculiar participation of non-government schools in the inspection process is both delicate and anomalous. There are many dubious non-government schools concerning which, it is submitted, the community requires better information and prospective parents deserve fair warning. "
The report also criticises the use of lay inspectors. "Lay inspectors, although valuable, are not the sort of people at first envisaged. Often regarded as a kind of token or talisperson, the lay inspectors certainly do not reflect the views of local school communities. Nor are they generally small business people or artisans. Rather they tend to be professionals and are often rather closer to the system than originally intended."
A spokeswoman from OFSTED disputed any implication that it is not concerned with raising standards. The Office, she said, operates as the law requires it to do.