The Al-Madinah free school in Derby has been rated as making "reasonable progress" following the latest visit by Ofsted.
It is the second inspection since new Trustees were in place. Inspectors said the children's achievement is improving thanks to better teaching.
The pupils' behaviour was described as "exemplary" and parents told inspectors that they have seen an improvement in the way the school is organised.
In November last year the school was described as "dysfunctional".
MPs have argued that the failures at the Al-Madinah free school in Derby are a clear sign that the government’s methods for overseeing free schools are inadequate.
The Commons Public Accounts Committee found that fewer than half of all free schools across the country submitted their financial returns for 2011/12 to the Education Funding Agency on time.
Chairman of the committee, Margaret Hodge, added that the government and agency were too reliant on whistleblowers.
Recent high-profile failures at Al-Madinah School, Discovery New School and Kings Science Academy demonstrate that the DfE and the EFA's oversight arrangements for free schools are not yet working effectively to ensure that public money is used properly.
The department and agency have set up an approach to oversight which emphasises schools' autonomy, but standards of financial management and governance in some free schools are clearly not up to scratch.
The agency relies on high levels of compliance by schools, yet fewer than half of free schools submitted their required financial returns for 2011-12 to the Agency on time.
Whistleblowers played a major role in uncovering recent scandals when problems should have been identified through the Agency's monitoring processes.
A scathing report by MPs has criticised the government’s handling of its flagship free schools scheme - saying there is not enough monitoring of where taxpayers’ money is being spent.
The Al-Madinah free school in Derby has been highlighted in the report, published by the Commons Public Accounts Committee, for its recent governance and management issues.
The report states that while the government had made “clear progress” on the scheme by opening new schools quickly, measures to check how the schools are run and whether money is being spent properly are not good enough.
It also claims that the government is too reliant on whistleblowers to expose wrongdoing.
Other schools highlighted in the report were the Discovery New School in Crawley, West Sussex, which was closed down last month, and Kings Science Academy in Bradford.
53 students have already left Al-Madinah school in Derby ahead of the closure of its secondary classes.
The figures have emerged in the latest Ofsted inspection report following a monitoring visit last month.
The Department for Education announced that secondary provision at the Muslim free school would end when the current academic year finishes in July.
Since the decision in January, the school and the city council have been working to find places for its pupils at other secondary schools in Derby.
Ofsted says there were 140 secondary students at the time of its previous monitoring inspection in November. There are now 87.
The controversial Al-Madinah free school in Derby is making "reasonable progress", according to Ofsted inspectors who carried out a monitoring visit last month.
The school hit the headlines last year when there were numerous complaints from staff and teaching unions about the way it was being run.
It was placed into special measures and described as "dysfunctional" by Ofsted. Education minister Lord Nash subsequently decided to close the secondary school at the end of this academic year.
Since then, the original trustees have been replaced by a new board, and the school has been supported by Greenwood Dale Foundation Trust in making improvements.
Parents with children at the Al-Madinah free school in Derby will meet with the school trust later on today, after Friday's shock announcement that the secondary part of the school will close.
The school, which was described as 'chaotic and dysfunctional' by Ofsted, will stop teaching the older students at the end of the summer term.
The issue is also due to be discussed in the House of Commons today.
Greenwood Dale Foundation Trust says it has much to resolve as it continues to advise Derby's Al-Madinah School.
The Muslim free school has been labelled "in chaos" by education inspectors just weeks after it was placed in special measures for failing its pupils.
GDFT says it will continue to work with the school to ensure it has a sustainable future.
The GDFT has been working with the school since Lord Nash asked us to. As Chief Executive I have been very involved with this and I am advising my Trust Board that we continue with our school improvement work.
There is still much to do to resolve the issues raised by Ofsted and our priority is to make sure the school has a sustainable future. When that has been achieved I will be in a much better position to advise my Board further.
The full findings of the latest Ofsted report into the Al-Madinah free school, in which inspectors said there had been "no improvement".Read the full story ›
A scathing report into a Derby free school claims it "remains in chaos" more than a month after an initial inspection labelled it "dysfunctional".
A total of 47 pupils have left in the past few weeks, while five members of staff have resigned, according to Ofsted inspectors.
The inspector, Wayne Norrie, has now strongly recommended that no newly-qualified teaching staff are taken on as the school's action plans for improvement are "not good enough".
An Ofsted report has found there are "no signs of improvement" at the Al-Madinah free school in Derby, with relationships between school leaders at all levels labelled "destructive and deteriorating".
The school's action plan for improvements was found to be not fit for purpose, and inspectors also found teachers are not being held to account for inadequacies in teaching.
The inspection was carried out on November 29, just weeks after an initial report labelled the school "dysfunctional."