The report says the present policy of pledging places to such pupils, along with out-of-area siblings, is not legally sound and could be challenged in the courts.
The council is being forced to urgently review admissions arrangements for its schools for September next year. The new policy will mean parents who apply by a published closing date will be given priority over those who put in late applications.
Alan Kaye, director of education and community development at Isle of Wight Council, said: 'We are very disappointed by the ombudsman's ruling, which will mean some island children will not be able to attend their local school.'
The complaint to the ombudsman was brought by two separate sets of parents, concerned their children were denied a place at their preferred high school. These schools were said to be full once places had been allocated to children within the entitlement areas.
The ombudsman found the council guilty of maladministration and injustice and recommended it offer places to both children at their parents' preferred high schools.