A Cisco router running IOS release 12.3 can act as a proxy DNS server - when you configure ip dns server and ip name-server ip-address, it starts forwarding any received DNS requests to the upstream name server.
The router does not act as a recursive server, it just propagates the requests. For example, if the client asks for A record for www.nil.com and the upstream DNS server responds with a NS record for the .com tree, the router will not perform recursive DNS lookups to get the answer (and the resolver code in most clients will fail). The upstream DNS server has to be willing to perform recursive lookups for you.
You can use this functionality (potentially in combination with other external proxies) to set up an environment where the clients do not need to access the Internet directly.