From http://msdn.microsoft.com/en-us/library/ms176089.aspx
varchar [ ( n | max ) ]
Variable-length, non-Unicode character
data. n can be a value from 1 through
8,000. max indicates that the maximum
storage size is 2^31-1 bytes. The
storage size is the actual length of
data entered + 2 bytes. The data
entered can be 0 characters in length.
The ISO synonyms for varchar are char
varying or character varying.
1 character = 1 byte. And don’t forget 2 bytes for the termination. So, 2^31-3 characters.