There's no contradiction: If you have the plaintext input, you are required to have at least a (non garbled) function describing your operation, so it doesn't imply obfuscation.
Anything that can be written as a function can exploit FHE, as long as the output doesn't grow (i.e. you have to account for growth before)
Additionally, you should keep in mind that when doing the weird virtual machine thing you are not dealing with a single program. There are in fact 4. The actual program, call this P, you want to run on your data, the program to encrypt your program P along with its data, call this E, the virtual machine to run this encrypted program on the server, call this V, and finally the program to decrypt the result from running V on the output of E, call this E'.
Clearly, if we compose all these programs and run it on some data D, we get E'(V(E(P, D))) = P(D). However, the server doesn't know E, D and P and certainly doesn't know E'. The only thing the server knows is the value of E(P, D) and what V is. I haven't looked at the paper to deeply but I suspect it's vitally important to their result that you have some type of oracle that given a D, tells you the output of P(D), but the server cannot have that or else it would be pointless wasting your time with this FHE thing.
Input = FHE(data|opcode1|opcode2|...|opcodeN)
The server won't know what are the (opcode1|...|opcodeN) if the FHE scheme is properly implemented. That is, the actual implementation would be something like
Input' = FHE(data|opcode1|opcode2|...|opcodeN|randomness)
Output' = InverseHE(FHEval(Input'))
Output = Output' - randomness
I.e. the server can't uncover the (data,opcode1,...,opcodeN) tuple by enumeration if exp(randomness) is large enough. Is this what you had in mind?
It still has to execute the opcodes, revealing the computation in that sense. All the randomness adds (if I understand your example) is additional "junk" computation, that's unrelated to the output you really want -- but that's no different than you can already get with "plain" FHE, with obfuscation, or with adding pointless operations to a regular program.
With FHE the untrusted party can (usually) provide inputs (e.g. you can give them encryption of 1 and 0 that they can supply at some point in the circuit). But they cannot get _any_ non-encrypted output from the function without knowing the encryption keys (which would let them see everything).
FHE for secret operations is very straight forward. You first define a universal circuit— that is a circuit that can compute the result of any circuit (of the size) depending on its inputs. You then have the FHE environment run that universal circuit with the operations you really want specified as an input.
The result precluding blackbox obfuscation is really more about the formalism than a true practical impossibility, see Gentry's recent candidate indistinguishably obfuscation for NC circuts, which he boosts into full obfuscation for arbitrary circuts by implementing a pair of homorphic encryption decryption circuits under it.
Okay, the issue isn't whether you can obfuscate, but whether you can do it in a stronger sense than "regular" FHE or plain ol binaries or deliberate obfuscation. And what you've described doesn't do that.
The universal FHE circuit still sees the operations "you really want to execute", as it has to implement them in the first place. It's certainly obscured "gee, what do all these ANDs in this structure mean", but that's no different from eg an FHE scheme where you compute the circuit for the specific input size/function pair you want to compute rather than let the untrusted server generate it from knowledge of the algorithm you pass it.
So yeah, it's obfuscated, but no more than you get through regular computing; FHE has added nothing in this respect.