The research, which was compiled in association with PricewaterhouseCoopers and surveyed all the leading online media owners, showed that online now holds a 2.5 per cent share of the total advertising spend.
The IAB found that if growth continues at its present rate, the online industry is set to beat its target to overtake the radio sector by 2007.
Radio holds a 3.8 per cent share of total advertising spend, the report revealed.
Growth in online spend is because of consistent audience expansion and the creative industry increasingly embracing the medium, the report said.
The IAB also believes that its education and training programme, designed to promote online advertising to marketers, has contributed to this upturn.
Danny Meadows-Klue, the chief executive of the IAB, said: "The whole marketing industry is changing and online is at the heart of the new media mix that is evolving."
He added: "Years ago, many people claimed that online would wipe away traditional media, but today we realise it supports it, accelerating its effects and stretching its reach.
From the smallest entrepreneur to the largest retail giant, every industry sector uses online - whatever the brand, their audience is already here."