Think of a terror star as a death star (I'm sure George Lucas has a trademark on that name!). The big difference is the terror star destroys the entire system, not just one planet. You may see in strategy posts the term "TS AS". This is a Terror Star Alpha Strike. An alpha strike is basically a sneak attack on a massive scale.
Example:
Playing against 5 opponents (5 Major races, you don't need to eliminate the minors). I have 35,000K in my treasury and 7 stacks/fleets of 5 constructors each. In this example, I have the ability to create up to 7 terror stars this turn. Unfortunatley my opponents have a total of 11 star systems between them. This means I cannot eliminate everyone at once.
I need 4 more terror stars. This means I need to build 20 more constructors (5 needed to complete all stages of a terror star). I can either wait until I have enough cash and constructors in place to strike all at once (TS AS for the whole galaxy), or eliminate one or more opponents up to a total of 7 systems (TS AS for one or more races).
HINT: Even at Maso level, the AI will allow your stack/fleet of constructors to loiter at the edge of a system they occupy. Simply loiter you fleets until you have the desired amount ready, move them into the square right next to the target system and then buid them. You'll have to wait a turn to attack, but still the AI will not (at least not in my experience) go to war with you for this. Next turn, "hasta la vista baby".
WARNING: If you try this with a race you are already at war with, your constructors will almost certainly get destroyed long before they get near the target.
Hope this helps some!!!