as far as my uses, proxy servers hide your IP address and can get arround oppressive government filters. but how does it work?
Your web browser sends a request to the proxy, and the proxy forwards the request to its destination, and sends the result back to you. Thus, the server sees the IP of the proxy, instead of your own. In addition, if The Great Firewall of China lets you see a proxy server outside their control, it can be used to view sites not available directly.
Most proxy servers are used by corporate and educational networks as a cache, in order to reduce outgoing network traffic.