If you have an interest in the handheld marketplace and a desire to invest in companies behind the iPod, cell phone, and PDA craze, ARM Holdings PLC (NASDAQ:ARMHY) may be your best bet. Most technology-savvy consumers know that Apple (NASDAQ:AAPL) makes the iPod, PalmOne (NASDAQ:PALM) makes handheld computing devices, and Sony (NYSE:SNE), through Sony-Ericsson, makes cell phones. But how many consumers know that the real secret behind these little high-tech marvels is the advanced chipsets designed by ARM Holdings?

Because ARM Holdings uses a royalty-based business model much like Qualcomm's (NASDAQ:QCOM), licensing its intellectual property to tech behemoths such as Intel (NASDAQ:INTC) and Texas Instruments (NASDAQ:TXN), its critical role in the handheld revolution is often overlooked.

Fool readers have, of course, known about this dynamic company for some time. We've followed the company for quite a while, and it has also been a two-time pick by David Gardner for Motley Fool Stock Advisor subscribers.

ARM Holdings recently reported second-quarter results, so let's check in on how the behind-the-scenes company is faring. Total revenues rose 18% versus the same period last year. Its $18.8 million in pre-tax income exceeded analyst estimates, and net income jumped 60%. ARM Holdings also reaffirmed its outlook for 2004, which should put investors more at ease given the recent sell-off in the chip sector.

In addition, ARM Holdings signed a deal to license its technology to Chinese networking company Huawei. Beginning in 2006, Huawei will introduce wireless networking products outfitted with ARM's microprocessor cores. With Huawei creeping in on the territory of giants such as Cisco (NASDAQ:CSCO), this looks like a solid deal for ARM.

ARM Holdings' balance sheet looks good with $301 million in cash and equivalents and zero debt. The firm's gross margins top 90%, and net profit margins are above 10%. Shares are trading in the low-$6 range at a forward price-to-earnings ratio of 26, with projected earnings growth of 44% for 2005. Given this, ARM Holdings has a reasonable valuation to go along with its solid financials.

Considering its dominance of the handheld market and efforts to maintain that dominance (an amazing 38% of its revenues are plowed back into research and development), and the firm's ability to use its free cash flow to fund future operations, ARM Holdings deserves further consideration for investors interested in owning a tech stock that's profiting from its intellectual property.

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Fool contributor Jeremy MacNealy does not own shares of any companies mentioned.