Thanks Pots, I double checked that and all bells and whistles are on. However, I will post what I found out last night....
I jumped onto my server last night to try and tackle this problem and Mr Skaarj Lord himself EA_Elemental jumps on.
Sir Mandrake: "Hey Elemental, are the flashlights working for you?"
Elemental rounds the corner and shines a WORKING Enhanced Flashlight in my face, "Yep!"
Sir Mandrake: "WTF??!"
Elemental: "You gotta hit ENTER dude!"
Sir Mandrake: "D'oh!!"
Both Monster Hunters stand there for a moment as Sir Mandrake FacePalms himself.
So yeah, it all works as intended. Im so used to picking up lights on other servers and they automatically turn on. I havent looked yet but is there a setting to switch on the light when its picked up?
Thanks to EA_Elemental for the heads up on that..