As a player, his career spanned three VFL/AFL clubs; most notably Hawthorn where he played in three premierships as well as achieving All-Australian selection honours on three separate occasions, two with Hawthorn and the other with Footscray Football Club, where he also earned two Best and Fairest awards.
As coach, he took the Western Bulldogs from 15th in 1996 to 3rd when he featured in the documentary Year of the Dogs a position in which the club held in 1997 and 1998 during which he was named coach of the All-Australian team. Wallace's coaching style is considered to be innovative and he is credited with having started the modern practice of sides warming up the side on the field before a match. However Wallace's coaching career at Richmond between 2005 and 2009 was not so successful, and he stepped down from coaching in June 2009.
Wallace was Hawthorn's centreman from the late 1970s through the 1980s. Recruited from VFA club Camberwell, he was a member of Hawthorn's 1978 premiership side in what was his debut season. Nicknamed 'Plough' for his knack of crashing through packs, Wallace was Hawthorn's best and fairest winner in 1981 and 1983, the latter in another premiership year. He played in one further premiership side at Hawthorn in 1986. Often polling well in the Brownlow Medal counts, Wallace finished equal third in 1982 and equal sixth in 1983.
After a contractual dispute with Hawthorn, Wallace received a clearance to Richmond but struggled in his only season with the club, eventually ending the year prematurely with a back injury. He finished his playing career with four seasons at Footscray which yielded back to back Charles Sutton Medals in 1988 and 1989.
In the middle of the 1996 AFL season he took over as the Western Bulldogs coach following the sacking of incumbent coach Alan Joyce. At the end of the 1996 season they finished 15th. In the 1997 season Wallace quickly rebuilt the side, finishing third at the end of the season. In the first qualifying final they defeated Sydney but then lost in the preliminary final to Adelaide. In 1998 the Bulldogs finished second at the end of the season. In the qualifying finals they defeated the West Coast Eagles but lost in the preliminary final to Adelaide for the second year in a row.
In the 1999 AFL season Wallace led the Bulldogs to fourth at the end of the season but in the qualifying finals they lost to West Coast then in the semi finals they lost to the Brisbane Lions. In the 2000 AFL season the Bulldogs finished seventh but in the elimination finals they were knocked out by the Brisbane Lions. During this season the Bulldogs were the only team to defeat Essendon as Wallace employed "flooding" tactics. In the 2001 AFL season the Bulldogs struggled and finished tenth and then kept struggling in the next season. Wallace resigned as Bulldogs coach at the end of the 2002 season with one match left to go, which Peter Rohde coached and was eventually employed full-time.
Wallace was linked to the Sydney Swans job in mid-2002 when Rodney Eade was sacked following a narrow round 12 loss to Geelong. It was rumoured that there was a verbal agreement that the Swans would appoint him as their senior coach for the 2003 season. But Wallace was not given the Swans job and it went to then-interim coach Paul Roos, despite Wallace resigning as coach of the Bulldogs with one match remaining in the season.
During the period that Wallace was not coaching he became a prominent media personality with roles on Fox Footy channel, and as a columnist in Melbourne newspaper the Herald Sun, which he still maintains.
In August 2004 he was appointed the senior coach of Richmond for five seasons from 2005, replacing Danny Frawley.
His first year at Richmond was unsuccessful as they finished twelfth at the end of the 2005 season despite spending most of the first half of the season in the top eight, mostly in the top four. In 2006, three straight crushing defeats at the start of the season placed them at the bottom of the ladder, but they recovered to win five out of the next seven games, including a win against the Adelaide Crows, who were on top of the AFL ladder at the time; but they did not make the finals, just missing out and finishing ninth at the end of the 2006 season.
The 2007 AFL Season proved to be Wallace's worst at any club. Richmond won only three games to finish last on the ladder. The Tigers lost the first five games of the season by less than 25 points and maintained leads in many of those games going into the final quarter. However, in Round 6 the Tigers were soundly defeated by the eventual premiers, Geelong, at the Telstra Dome by a record margin of 157 points. This subsequently led to the board and management formally apologizing to supporters at Wallace's "Tuesdays with Terry" press conference.
The 2008 season was a vital year for Wallace in relation to his future at the club. Brett Deledio said that the club had to make the top eight at all costs in order to repay the faith shown by supporters. The season was a big improvement with Richmond starting off with a win over Carlton in Round 1. But the team did not make the finals with Richmond finishing ninth at the end of the 2008 season with eleven wins, ten losses and one draw.
Mounting speculation and reports of a rift with Richmond president Gary March were reported at the conclusion of the home and away season, mainly due to conflicting assessments of the sides performance between coach and president. These issues were denied by the club and coach. The appointment of Kevin Sheedy to a marketing role at Richmond following Sheedy's resignation as Essendon coach also resulted in more pressure on Wallace to deliver the Tigers a much overdue finals appearance in 2009.
At the start of the 2009 season Wallace was still under pressure after Richmond's 83-point loss against Carlton in Round 1 and further losses to Geelong, the Western Bulldogs and cellar-dwellars Melbourne. Despite controversial media reports describing Wallace as a 'dead man walking', he told a packed media conference after the Round 4 loss to Melbourne that he would not be resigning and would coach out the 2009 season at Richmond, the final year of his five-year contract. A subsequent Richmond Football Club board meeting gave Wallace a reprieve until mid-season before deciding his fate. On 29 April 2009 Wallace confirmed that he would not be coaching at any extent in 2010 and announced that he would resign as Richmond coach on 1 June 2009 but would coach one more game. Public scrutiny aimed towards Wallace is a main factor contributing to his resignation.
Wallace's last game as coach of the Richmond Tigers resulted in a loss against the Western Bulldogs, with the final score Richmond 14.5 (89) and Western Bulldogs 24.13 (157). Jade Rawlings served as caretaker coach for the remainder of the 2009 season.