Gamer slang. Pwned is a statement made from one player to another (often in an online first person shooter) to inform another player that he has been "owned", or dominated at the game currently being played. The typo is intentional. Some believe this variation of "owned" was born from the credits of Warcraft II, where instead of saying "Owned by...", someone mistakenly wrote "Pwned by..."
Can also be used in conversation about non-gaming situations. For example, "I pwned that exam!"
Pronunciation varies, from "pohned" to "pwohned" and beyond.