Google’s advertisement and link auction network. Most of Google’s ads are keyword targeted and sold on a cost per click basis in an auction which factors in ad clickthrough rate as well as max bid. Google is looking into expanding their ad network to include video ads, demographic targeting, affiliate ads, radio ads, and traditional print ads.
AdWords is an increasingly complex marketplace. One could write a 300 page book just covering AdWords. Rather than doing that here I thought it would be useful to link to many relevant resources.