It's pronounced just like "owned" only with a p in front of it. Powned shortened to pwned. The word is a corruption of the word "owned." This originated in Warcraft, where a map designer misspelled "owned." When the computer beat a player, it was supposed to say, so-and-so "has been owned." Instead, it said, so-and-so "has been pwned." Alternatively, it has been attributed to a prominent Quake player who misspelled "owned" and the new word "pwned" was adopted by people who thought it was "1337".
It basically means "to own" or to be dominated by an opponent or situation, and is sometimes used as more than mere "ownage." To be pwned means you were beaten so bad and did little or no damage in return, or "perfectly owned."
This is owned:
This is pwned:
And, this is pwned:
