I would call this a bug, but others may disagree.
The enhanced drop down included in Gravity Forms (GF) does not filter out invalid entries, which is the expected behaviour.
Try a GF country drop down and compare it to http://harvesthq.github.io/chosen/
by typng a y (for example)
Drop downs with hundred of entries are comparatively difficult to use in GF
To fix: update chosen in GF ( js/css + one sprite)