Why wouldn't this script work?

[Prelauncher]

No, SetEntityActive looks like this:

Code: (Select All)

SetEntityActive(string& asName, bool abActive);

I think that you have confused your functions, You don't have to name the function to what you want to use:
Example

Code: (Select All)

AddEntityCollideCallback("Player", "scriptarea", "MYFUNC", true, 1); //This is placed under void OnStart or OnEnter
void MYFUNC(string &in asParent, string &in asChild, int alState)
{    
SetEntityActive("Item1", true); //True means that you want the entity to be active, if you want it to be inactive you use false.
}