The Collaborative International Dictionary of English v.0.48:

Demagnetize \De*mag"net*ize\, v. t.
   1. To deprive of magnetic properties; to render nonmagnetic.
      See Magnetize.
      [1913 Webster]

            If the bar be rapidly magnetized and demagnetized.
                                                  --Am. Cyc.
      [1913 Webster]

   2. To free from mesmeric influence; to demesmerize. [archaic]
      [1913 Webster +PJC] -- De*mag`net*i*za"tion, n. --
      De*mag"net*i`zer, n.
      [1913 Webster]

WordNet (r) 3.0 (2006):

demagnetize
    v 1: erase (a magnetic storage device) [syn: demagnetize,
         demagnetise]
    2: make nonmagnetic; take away the magnetic properties (of);
       "demagnetize the iron shavings"; "they degaussed the ship"
       [syn: demagnetize, demagnetise, degauss] [ant:
       magnetise, magnetize]