Let's say that I create a reseller account with 100 meg space and 1gig bandwith. I understand that they can not go over their limits. What exactly happens if I check the "Allow Overselling" box in WHM?

1. Does that mean that they can use over the limits that I have set?
or
2. Does that mean that they can create as many accounts as they want and the reseller will be screwed if their customers use all of the space allotted to them?

It means they can create however many accounts you've allowed them, but they can oversell the bandwidth and disk space.

example #1:
You allocate the reseller 500MB disk space, 5GB bandwidth and the ability to create 5 accounts and have overselling disabled:
They can create a maximum of 5 accounts totalling no more than 5GB bw and 500MB disk, say 5 accounts of 100MB disk and 1GB bw.

example #2:
You allocate the reseller 500MB disk space, 5GB bandwidth and the ability to create 5 accounts and have overselling enabled:
They can create a maximum of 5 accounts and allocate upto their limits in diskspace and bw to each account, say 5 accounts of of 500MB disk and 5GB each, but those accounts in total they will not beable to use more than 500MB disk space and 5GB bandwidth.

(that's how it's supposed to work anyway)

thank you