Maybe I'm missing something. I ran the first pass (Active/Inactive Status Inventory). It selected all the items I wanted, but the only option is to make Not Active.
If I select Obsolete under "Include Active Status" in this screen, it only looks at Obsolete items, and offers to make them Not Active.
This is how I have the options set:
Since I don't have any items already marked Obsolete, I can't run the second pass (Archive Obsolete Inventory).