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It isn't as much hassle as it sounds, you can script it so's
the ORACLE_HOME and OUI is on the EBS and you have a shellscript ready to go to build a yum repository and haul in the missing packages, and do the kernel changes needed.
Once you get handy with it, approx 25 mins start to finish.
Amazon Web Services currently has a limit of 10GB for the Amazon Machine Image (AMI) which becomes the root partition of your running EC2 instance. As you suggested, this doesn't leave a lot of room for installing other software. Your best bet is to utilize Elastic Block Storage (EBS) volumes as much as possible to store non-Operating System software and files. We certainly recommend using EBS volumes for storing all database datafiles, logfiles, etc.