"Nerfing" basically means reducing the power of a spell, class, or race.
For instance, bull's strength was "nerfed" because 3.5 reduces the duration from 1 hour/level to 1 minute/level.
As far as WHY we call it "nerfing", it comes from the concept of the "Nerf" brand footballs or baseballs - the company basically took something that was hard and made it soft (so kids wouldn't get hurt). Hope this makes sense.