Sqlcmd utility reference with description of setvar is here.
http://msdn.microsoft.com/en-us/library/ms162773.aspx

There is a good article on variables in sqlcmd using setvar.
http://blogs.msdn.com/gertd/archive/2007/01/08/variables-to-the-rescue.aspx

In Sql Server Management Studio, script filenames end with .sql. For sqlcmd scripts, I use .sqlcmd.sql to distinguish from a transact only .sql script.
www.programmer.bz/Forum/tabid/259/forumid/8/postid/47/scope/posts/Default.aspx

Unfortunately, you cannot use sqlcmd script variables within the :setvar statement. So you cannot do something like this.

:setvar pathscripts "c:\sql\scripts\"
:setvar pathmyscripts $(pathscripts)"my\"

You can use sqlcmd script variables in other sqlcmd and transact sql statements.

In sqlcmd statements you do not quote the variables.

:setvar pathscripts "c:/sql/scripts/"
:r "$(pathscripts)"myscript.sqlcmd.sql

In transact sql statements you must quote the sqlcmd variables, otherwise you get errors from transact sql.

print 'pathscripts=$(pathscripts)'