what occurs in room 101?

Really anything that terrifies you the most. It is the room of final torture or "re-education". Room 101 is different depending on each person,

"The worst thing in the world," said O'Brien, "varies from individual to individual. It may be burial alive, or death by fire, or by drowning, or by implement, or fifty other deaths. There are cases where it is some quite trivial thing, not even fatal." (part 3)

For Winston, of course, the worst thing in the world is rats. The room does its job by destroying any resistance the human psyche may have to complete submission to Big Brother. Indeed, it would seem that one comes out of room 101 either dead or in love with Big Brother.