The Independent Monitoring Commission says the IRA leadership has continued to dismantle its structures and remains committed to a political path.
The report said the IRA continued to disband paramilitary structures
The body also said Sinn Fein's endorsement of the police was a major step forward in the IRA's move away from paramilitarism.
The organisation set up to monitor levels of paramilitary activity said it was "a very major development".
Its 13th report covers the period 1 September to 30 November 2006.
NI Secretary Peter Hain said the latest report from the ceasefire watchdog demonstrated the Provisional IRA's "commitment to the political path".
The Irish Government welcomed the IMC's "very positive assessment" of the PIRA's commitment to democratic politics, and added that power-sharing should not be delayed any further.
The IMC delayed finalising its report until the outcome of Sinn Fein's special ard fheis on policing was known.
It said: "The decision of the ard fheis (special party conference) held on January 28, 2007 to support policing and the criminal justice system was a very major development.
"That decision and the efforts invested by the leadership of the republican movement in presenting the arguments in favour of the change were further substantial evidence of their commitment to the democratic process."
The commission said during months of consultation about its policing plans, republican leaders encountered some resistance.
However, this had been expressed politically rather than through violence.
The IMC report said the PIRA was no longer involved in attacks nor preparatory acts such as recruitment, training, weapons procurement and development or targeting.
It said the organisation continued to disband paramilitary structures, although some members had tried to acquire small arms for their own purposes against the leadership's instructions.
The report said they did not appear to have been successful.
Some individual members were still involved in activities such as smuggling and fuel laundering, but this was declining as a result of instructions from the IRA leadership, it added.
It also the republican movement was continuing to gather intelligence, but did not think this was for paramilitary purposes.
The IMC said dissident republicans continued to be active and the it reported the recent formation of a "dangerously active" new hardline group, Oglaigh na hEireann.
It has launched pipe bomb attacks against the police and seeks to recruit dissident republicans.
The IMC welcomed moves within the UDA and the UVF to move away from paramiitarism and criminality.
However, it said the two main loyalist paramilitary groups needed to accelerate those moves and were still involved in racist and sectarian attacks and criminality.
The report said UDA members were behind attacks against immigrants in Antrim and had tried to force some foreign nationals from their homes.
The organisation was responsible for the majority of loyalist shootings and beatings, it said.
The commission said the UVF "had scaled down its violence, with no record of any so-called punishment shootings and assaults and leadership instructions for members not to get involved in crime.
DUP deputy leader Peter Robinson said the report seemed to mark further progress in the winding down of the IRA's paramilitary campaign.
"This latest report, whilst welcome, does still leave a number of issues which need to be addressed particularly the involvement of IRA members in criminal activity," he said.
Ulster Unionist leader Sir Reg Empey said the report had provided clarity over the IRA.
"It is clear that barring some sporadic and unsanctioned activity, the IRA continues to make progress towards exclusively peaceful and democratic means," he said.
Despite the positive report on IRA activity, Sinn Fein's Conor Murphy said the IMC should be "wound up".
"The IMC should never again be allowed a say over people's democratic rights and entitlements," he said.
SDLP leader Mark Durkan said the report contained the progress that should have happened years ago when the Good Friday Agreement was signed.
"It is vital that the DUP stops burying its head in the sand and denying the progress that is being made," he said.
The Alliance Party's Stephen Farry said the IMC was "playing a critical role in facilitating the path to political progress".
The four-strong Independent Monitoring Commission was set up by the British and Irish governments in January 2004.