This is more of a 'I don't know PHP that well' issue than a Gravity forms issue, but I've seen others ask this once or twice on the forums at both locations and never saw a definitive answer.
I have followed the instructions on setting up the hooks in http://www.gravityhelp.com/forums/topic/right-parameter-names-to-pre-populate-the-names-fields#post-14044, instead of getting the first and last names in the fields, it's displaying the fields at the load point of the form, and then putting '1' in each field.
The functions.php hooks: http://www.pastie.org/2647238
Results: http://grab.by/b0Re
Just based on the results I would think it is some simple issue with the create_function echoing the results on execute instead of storing it in the variable, but I just can't see it...