A multi-port networking device (eg. Ethernet switch) implementing Proxy Arp will respond to ARP requests on one interface as being responsible for addresses of device addresses on another interface. The device can then receive and forward packets addressed to the other devices.
The advantage of proxy arp over other networking schemes is simplicity. A network can be extended using this technique without the knowledge of the upstream router.
Disadvantages include scalablility - ARP resolution is required for every device routed in this manner. And reliability, no fallback mechanism is present, and the masquerading can be confusing in some environments.