T-SQL Does not like Set ???

You need to wrap the function body in a BEGIN ... END block as per http://msdn.microsoft.com/en-us/library/aa258261(SQL.80).aspx.

Here's a version of your function that should work. The "exit" keyword does not exist, and your RETURN statement was located too high.

Create Function RangeOfMonths
(
    @StartDate datetime,
    @EndDate datetime 
)
Returns
@RangeOfMonths Table
(
    MonthName varChar(15),
    YearOfMonth int
)
BEGIN
    Set @EndDate = DATEADD(dd,-(DAY(@EndDate)-1),@EndDate);

    --not needed, loop will not execute in this situation
    --If @StartDate > @EndDate RETURN; --not EXIT

    While @StartDate < @EndDate
    Begin
       Insert Into @RangeOfMonths
       Select DateName(mm, @StartDate) , DateName(yy,@StartDate); 
       Set @StartDate = DATEADD(MM,1,@StartDate);
    End
    Return; --moved out of WHILE loop
END