Sales of products marketed to 3-11 year olds with the use of popular cartoon characters last year stood at $746m, a nine percent increase since 2002.
Kids' Licensed Foods and Beverages, published by Packaged Facts, predicts that the market will continue to grow at a " slightly lower than historical" annual rate of seven percent, to break the $1bn mark by 2007.
The main reason for this slow-down in growth is the mounting pressure on industry to slash its marketing efforts of unhealthy products to kids.
In recent years, parents, consumer groups, and finally also government, have campaigned for guidelines to be established that would limit the marketing of foods and beverages to children, including the use of licensed characters on products that do not meet certain nutritional criteria.
This has made keeping pace with the market difficult for some marketers, said the report.
However, it predicts that once the "painful period of re-assessment and re-adjustment" passes, kids' licensed products will again see significant growth.
"Packaged Facts expects alternative kids' licensed products to crop up on store shelves in the once-avoided healthy profile categories, and for marketers to make use of new avenues for promotion that are focused less on television and more on interaction," said Cathy Minkler, associate editor of Packaged Facts.
Industry has stepped up to the challenge through voluntary initiatives to improve the nutritional profile of products it markets to kids.
The Council of Better Business Bureau's (CBBB) Children's Food and Beverage Advertising Initiative was set up last year as a voluntary self-regulation program for industry.
Participants adopted nutrition standards to all marketing aimed at children, and also committed to devote at least half of their kids' advertising to promote healthier products, good nutrition and healthy lifestyles.
The initiative is currently made up of 12 participants: Cadbury Schweppes, Campbell Soup, Coca-Cola, General Mills, Hershey, Kellogg, Kraft, McDonald's, PepsiCo, Unilever, Masterfoods and Burger King, the latter of which joined last month.
Packaged Facts states that these "major companies that account for a large percentage of children's food and beverage advertising have already pledged to curb their advertising of junk food to kids and no longer use licensed characters to advertise online or in print media unless they're promoting healthier products, and we project that more snack manufacturers will introduce health snack alternatives to drive future profitability".
If the food industry's voluntary measures are not considered an adequate response to the issue, it is highly likely that new regulations will be implemented to enforce advertising restrictions.
However, it is not just food and beverage manufacturers that have been agreeing to certain guidelines.
Leading kids' entertainment brand Nickelodeon recently said it will stop licensing its characters for use on 'unhealthy' foods and beverages, as part of its commitment to help slow the growth of childhood obesity.
In August it announced that as of January 2009 its licensed characters on food packaging will be limited to 'better for you' products, in accordance with government dietary guidelines.
Nickelodeon's characters have so far primarily been associated with products such as cereal, ice cream and candy.
However, the group in 2005 launched a licensing initiative to encourage a healthier diet for kids, and said it expects to continue promoting healthy products.
Since then, other 'healthy' moves include a licensing agreement with fruit firm Summeripe Worldwide, to bring Nickelodeon's most popular characters, SpongeBob SquarePants and Dora The Explorer, to packs of peaches, plums and nectarines.
Previous agreements by the network have seen its characters used on fruit and vegetable products including fresh baby carrots, clementines, apples, pears, cherries, spinach and organic edamame.
According to Nickelodeon, its two characters - SpongeBob and Dora The Explorer - currently bring in around $1bn each per year in sales of branded goods.