The example was taken directly from Books Online (August 2008)
When the expression exceeds the specified length, the string returns ** for the specified length.
SELECT STR(123.45, 2, 2);
Here is the result set.
(1 row(s) affected)
The trouble with out of context quotes is that they can be utterly misleading. The sentence in BoL assumes that you know what "the expression exceeds the specified length" means, which is explained somewhere further up the page. Without that bit further up the page, there are two things that people might assume it means: (i) the length of the expression is longer than the length parameter, which seems at first sight quite a reasonable guess but only makes sense with a definition of "the length of the expression", and since no definition is supplied people would probably assume to be, for example , 4 for 1.23, 5 for -1.23, and so on which is also a reasonable assumption but certainly incorrect; (ii) the value of the expression is greater than the specified length, which is neither a reasonable assumption nor correct. What it actually means is that the length parameter specifies enough to hold the amount of teh expression that would, in a full representation, be to the left of the decimal point (don't forget that that length depends not only on the sign but sometimes also on whether rounding of truncation is used (which in turn, in the cases where it matters, depends on whether the expression's value is greater than -1014 and less than 1015 or not (if I've remembered all this stuff correctly - those may not be the right bounds).
Copying a piece of the page that is meaningless out of context makes an awfully bad explanation (the BoL page is, as Hugo points out, is pretty awful too, but it least the text further up the page prepares you for the somewhat bizarre sentence quoted).
edit: fix marks