Multi-statement Table-Valued Function

I'm creating a Multi-statement Table-Valued Function...

Is it possible to insert variables into the table? In other words, is it possible
to have something like

declare
@value1 varchar(10)
@value2 varchar(10)

BEGIN
<do some work on value1 and value2>
INSERT @returningTable
@value1, @value2

instead of

BEGIN
<do some work on value1 and value2>
INSERT @returningTable
SELECT col1, col2 from T_SOURCE

Here's why I want to insert variables...My function needs to return a table which contains a 'partial' incremental key.
I'll go with an example to explain what i have to do

Source_table
col1 col2
Mike 10
Mike 20
Ben 50
John 15
John 25
John 35

The table that my function needs to create should look like this
col1 col2 col3
Mike 10 1
Mike 20 2
Ben 50 1
John 15 1
John 25 2
John 35 3

I thought of creating a cursor and then looping through it generate col3 and save values of other individual columns in variables. But don't know how to use those variables when inserting records into function table.

Any other ideas? I'm caoming from Oracle world, I might be having some strange ideas on how to solve this problem. Any help is appreciated.

Thank you.