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well if the include is not working then you would get 2 errors, 1 would be saying somthing like "could not include file functions.php" and the other would be like "undefined function links on line whatever"
are you getting those errors? is error_reporting set to E_ALL -> error_reporting(E_ALL); ?
I am going to say that its a problem with your function, and not with the include.
always, always, always, save a backup copy on your own computer. most editors can do this automatically for you whenever you save the file as a remote file.
I tried out a simple echo function and it works so i'm thinking the problem is because i'm declaring variables in functions.php to be used in index.php which can't be done or something?
in your case I think that you just want to return the variable that you are setting. if you set a variable in a function it does you not good usually unless you return it.
What hiddens3crets came up with could be made to work using references though Far more advanced than you run-of-the-mill function stuff by look up "PHP Functions By Reference" in the manual. It's not exactly like that... you do need to pass the argument "by reference" but it still makes changes such as that