You're closest with (1) - I don't know of any reputable registrar that would dare to put ads on a client's site! Maybe if they offer a parking page while you're not using the domain it will say something cheesey like "Registered by another satisfied customer of blah blah", but once you're using the domain no way.
You can buy reseller packages in bulk from a number of companies, though you usually (not always) have to give a fairly hefty deposit. For example you can buy domains wholesale from eNom at $6.95 a pop, but you have to hand over $6,950 as a deposit first...
I believe the current rate charged to accredited registrars is $5.99 which is why companies like eNom, GoDaddy et al can offer domains to resellers for so little.
There's more information on the accreditation process at: http://www.icann.org/registrars/accr...on-process.htm