If something demoralizes you, it makes you feel bad or hopeless. When your soccer team was trounced by the last-place team in the league, the loss seemed to demoralize everyone, from players to coaches to fans.
Demoralize can also mean what it looks like, "to remove the morals of." For example, parents worry that R-rated movies will demoralize their children. In other words, they fear kids will lose their sense of what's right and wrong if they see glamorous actors indulging in bad behavior.