It's called Wolff's Law:
http://en.wikipedia.org/wiki/Wolff's_lawBasically means that bone density increases to match loads and forces imposed upon it over time. I don't know what the long term implications are for this kind of training but I doubt that the health of your joints or muscle tissue will be brilliant while using this kind of training.
Conditioning is a grey area for me personally. The benefits do not outweigh the potential costs in my opinion but if you're willing to pay the price for strengthened bones then it's a viable training method. What I can say is that just conditioning training on its own won't make you a good martial artist and you can be a good martial artist even without any conditioning training at all.
P.S. Bruising is not nerve damage, it's caused by capillary damage and blood filling an area under the skin. As with all cases of internal bleeding, it can lead to complications (albeit rarely in the case of light bruising). Nerve damage may accompany bruising.
Repeated light bruising can aggravate the damage and cause more serious injury over time.
Bruising on purpose for conditioning is silly and potentially dangerous with no obvious benefits I can think of. Conditioning is done for the purpose of strengthening bones, not for causing damage to your muscle tissue and capillaries.
http://en.wikipedia.org/wiki/BruiseI'm sure any doctors we have on here can expand on this information.
P.P.S. Weight lifting is a completely different case and is completely safe as long as you follow correct form. Progressive improvement in strength from weightlifting is a result of improved muscle fibre recruitment and an increase in muscle cross-sectional area caused by micro-tears in muscle tissue which do not cause damage to capillaries. Weightlifting should not be used as an analogy for conditioning.
Pseudo-science... I never saw the point in listening to it when there are hundreds of actual scientific studies on this kind of subject.