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A corruption of the word "Owned." This originated in an online game called 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."
It basically means "to own" or to be dominated by an opponent or situation, especially by some god-like or computer-like force.
"Man, I rock at my job, but I still got a bad evaluation. I was pwned."
I use all this 1337 speak crap as more of an inside joke. It's usually when I'm making fun of someone "OMG THOESE GUYZ R C4MMPING F4GS L4M3Rs. EW SHUOLD PWNE TEHM ALL!!one1"
I prefer to use terms completely out of context. I'll say crap like "Man, I got owned by a server at work today." or "I owned that ISDN router like it's no one's business." It's funny when people give you crazy looks for talking like that.
My favorite online has to be: "Guys.. I think we just got served."