When you terrorize someone, you act in a way that makes that person feel terrified, or full of fear. A bully might terrorize his younger victims by threatening to beat them up.
There are more and less serious ways to terrorize someone: actual terrorists, who use violence to achieve political goals, are a classic example of people who terrorize. A less grim way to terrorize might be an older sister coercing a younger brother into doing her chores by threatening to hide his favorite toys. In either case, the victim experiences some degree of fear, and the person who terrorizes feels a sense of power and control.