Proxy Address Resolution Protocol (ARP) provides connectivity between physically separate networks without creating any new logical networks and without updating any routing tables. This topic also contains a description of transparent subnets, which is an extension to the proxy ARP routing technique.
ARP routing allows physically distinct, separate networks to appear as if they were a single logical network. It allows systems that are not directly connected to a local area network (LAN) to appear to other systems on the LAN as though they are connected. This is useful in dial-up scenarios to provide connections to the entire network from a dial-in interface. The following figure shows a possible scenario. The 10.1.1.x is your home LAN and the 10.1.1.65 through 10.1.1.68 are your remote systems.
When a system on your home LAN (10.1.1.x) wants to send data to one of your remote systems, it will first do an ARP request. This is a broadcast that goes out to all your systems attached to the LAN segment to request the address of the target system, so a remotely connected system cannot see the broadcast. But with proxy ARP, your system knows which systems are connected remotely. If your system sees an ARP request for one of your remotely connected systems, your system replies to the ARP request with its address. Your system in turn receives the data and forwards it to the remote system. For this forwarding to take place, IP forwarding must be set to *YES. If your remote system is not connected, your system cannot reply to the ARP request and the requesting system cannot send data.