Essentially it means "is much better than" or "humiliates", and is most commonly used as a verb. "Pwn5" is
the ultimate way to say "pwns", much in the same way "1337" is the ultimate way to say "l33t".
The "5" represents the "s". It is also mid-way between 0 and 10, so is considered a direct hit between the eyes i.e. perfect. This stems from the origins of the word in online
multiplayer gaming, where a
perfect shot is respected.
So if you want to be 1337, you should say "pwn5" instead of "pwns" ;) :P