The best place to start is this article: What are Activations & Deactivations?. It answers all of your questions.
1. i have basic plan. so i get 1200 activations. i thought an activation meant that i issued a product key AND it's being used. if the user didn't use the product, in other words, if i sent a product key but it wasn't activated, then it doesn't count toward my activations limit, right?
No. http://wyday.com/limelm/help/activations/#faq
2. what's the difference between these 2 numbers? what do they mean? what do they represent?
A product key is that string that's about 30 some odd letters long "ABCD-EFGH-IJKL-...". Each product key can have 1 or more allowed activations.
3. if i delete product keys, that reduces the activations count toward my limit, right?
Yes. http://wyday.com/limelm/help/activations/#faq
4. if i download product keys in bulk but they are not used/activated, that does not count toward my limit, right?
No, they do count.