The function update runs once per frame, and keeps on repeating this every frame.

If I correctly understood your question, variables declared inside a function are temporary and must be initialized each time the function runs, while variables declared outside any function are member variables - they are initialized once when the script instance is created and retain their values while the instance exists:

var m: int = 1; // member variable

function Update(){
  var tmp: int = 1; // temporary variable
}

You also have the properties, which are a kind of virtual variables accessed by dedicated routines known as getter and setter - usually the setter routine does nothing unless the current value is changed (equal values are ignored).