The former Hollywood actor, who is fiercely protective of his image on the stump and on the screen, sued Ohio Discount Merchandise Inc. in April to halt production of the plastic dolls that featured a gun-toting Schwarzenegger in a business suit.
Under the new agreement, Ohio Discount can produce Schwarzenegger-the-politician dolls - without the gun. The $19.99 dolls will be available online, a statement from the company said.
Ohio Discount also agreed to donate a portion of sales to Schwarzenegger's nonprofit Arnold All-Stars after-school program in Los Angeles.
"We're very happy with the settlement, and we look forward to the release of the new Arnold Schwarzenegger bobblehead doll," said Todd Bosley, co-owner of Ohio Discount.
Schwarzenegger's lawyer Martin Singer said the governor was glad to see an end to the unauthorized uses of his image. "And he's happy to see the money going to his charity," Singer said.
The original Schwarzenegger bobblehead was part of a deal that included several Democratic presidential candidates, organized by Washington, D.C., lobbyist John Edgell, to raise money for two cancer and children's charities.
Bosley said he severed ties with Edgell when the former congressional staffer sought offers for a "Groping Arnold" bobblehead, after accusations surfaced that Schwarzenegger had groped several women during his years in Hollywood.
Edgell, who was also named in Schwarzenegger's suit, said he opposes the settlement and plans to seek an injunction.
He's now created a prototype for a "Governor Girlie Man Arnold" bobblehead featuring the governor in a pink suit and heels - a reference to the governor's recent insult that some Democratic lawmakers were "girlie men."
Edgell also said he would continue to seek to produce the assault weapon-toting Schwarzenegger.
"It was a political statement to tweak Arnold because he pledged to support an assault weapon ban and hasn't done anything," Edgell said. "Also because he stars in all these violent movies and has a pro-kid image."
By Laura Wides