Privacy is becoming an issue for Google. That’s why Google introduced a new functionality to Google Analytics called Anonymize IP. This feature allows Google to remove the last octet of the IP address if you implement this feature with your Google Analytics install. Google does warn that implementing this will "slightly reduce the accuracy of geographic reporting."
It is the webmaster’s alternative for to the opt out functionality integrated into webbrowsers. It will improve the privacy of users visiting your website, without losing lots of data or insights.