Question on Registration Method

Right now my registration / login system works like
this:

1-User goes to registration page and fills out form
2-User gets to choose username but password is
autogenerated by system
3-System encrypts password in database
4-Password is unencrypted and sent along with username
to registrant's email address
5-If email fails, insertion into registration database
is rolled back.

I have seen (as we all have) various types of reg
methods.
While I'm okay with mine, not completely satisfied.
I'd like to change it to the type where like above the
username and password is sent via email, but with the
addition of a link in the email whereby the user must
click on link to be "activated".  You probably have
seen this, but to spell it out - even though they have
the user name and password it somehow is not good
enough to login with until this "activation" takes
place.

Basically I'm drawing a blank on the precise method
for this system.
Couple of thoughts -
1-Perhaps there is another table that holds all "new"
registers until they are activated and then transfers
over the record(s) to the main reg table.
2-There is a column in the table that marks someone
registered ?
3-It's just governed by programming code
4-Combination of database and PHP to make it work.

Alright , obviously I have no clue.
Appreciate some help, guidelines, pointers, etc.

Thank you,
Stuart