When a user registers on a phpBB 2, their username is automatically displayed in a few public places, including the memberlist and the newest registered user on the index. Both of those also link to a profile for the new account. If the forum has account activation turned on, this means the forum is displaying an account that is not yet in use.

Hide Inactive Accounts prevents this by allowing only activated accounts to be displayed in these areas. Profiles of inactive accounts become visible only to administrators. This is a good way to help prevent link spamming by bots that register only to get their link on your site in the memberlist or profiles.