Sightings of grey squirrels have fallen by 45% in key areas - with red squirrels found in the south of Scotland for the first time.
Two harsh winters in a row took a toll on grey squirrels while the native species was able to withstand weeks of cold and snow.
Extensive culling of greys has also had a significant effect on numbers, according to conserv-ation project Saving Scotland's Red Squirrels.
The group studied sightings of squirrels at 95 feeder boxes on the "front line" between species in central and north east Scotland.
Greys have only been seen at 20% of the feeder boxes this year compared with almost 37% last year although in this area reds also reduced during what was described as a "bad year for squirrels".
But researchers are buoyed that red squirrel activity has been recorded in the south, despite cases of illness being noted.
Saving Scotland's Red Squirrels project manager Mel Tonkin said: "The most surprising thing to come from this report is the results from the south, where we have not surveyed before. It shows red squirrels in the area - something we did not know until now - and this despite the presence of squirrelpox. This could also be down to the work of Scotland's Red Squirrels in controlling grey squirrel numbers."
The report raises hopes that red squirrels are finally on the verge of victory over the grey after decades of struggle.
Greys, which originate from North America, once threatened to wipe out reds by robbing them of their habitat and spreading the deadly squirrelpox virus.
Heinz Traut, of Saving Scotland's Red Squirrels, who co-wrote the report, said two factors explained the drop in greys: "It's the harsh winter and grey squirrel control. It's certainly looking like the work we are doing is making a difference. I think the story is positive.
"The red squirrel population has stabilised and greys are greatly reduced."
The report warns there is no room to let up on greys.
"Sustained trapping effort may therefore prevent this species from rebounding, while allowing red squirrels to take advantage of any improvements in food availability by autumn," say the report authors.
Reds have been spotted in the south from Peebles to Maybole, Kirkcudbright and Gretna.
Sheila Iveson and husband William, 82, reported the first red squirrel seen in Annan, Dumfriesshire, in almost half a century. Mrs Iveson, 79, said: "[We] have lived in this house for 47 years and have never seen a red squirrel in the garden before."