You pay 10 cents per hour for each instance, plus 20 cents per gigabyte of data transfer. You can also combine it with S3 and pay 15 cents per gigabyte per month for storage. In the future, Amazon will likely roll out other tiers of instances, with more powerful instances costing more per hour.

This is a big change from most hosted models, in which you typically pay based on a maximum or planned capacity, plus fees for added redundancy. In the Amazon model, you pay only for what you actually use.

In order to use the service, you create a server image (called an Amazon Machine Image, or AMI), based on an Amazon spec. Ultimately, the server image will be able to have whatever operating system, applications, configuration, log-ins and security that you want. At the moment, it only supports the Linux kernel. Amazon also has prebuilt AMIs built that you can use as well, so that you don't have to configure them from scratch.

To use EC2, you upload the AMI, then invoke it and use it via an Amazon API. That virtual server can do anything you want --- power a database, speed downloads, power search or host a Web site, for example. You treat the virtual servers just as if they were your own servers.

Users can have multiple AMIs, and those AMIs can cooperate with one another, in the same way as servers can. So, for example, you could build a three-tiered application with three different AMIs. One tier could be a web server using Apache, a second tier could handle the application logic and the third tier could be the database.