Sandycheeks, do you have any friends who are lawyers or accountants? They're the best people to ask. Also, please be aware that rules on businesses vary greatly from state to state (and country to country).
To the best of my knowledge (which means: I could be dead wrong on some of this), you must report all income, regardless of whether it's a hobby or a business. In reality, you can probably get away selling a few hundred (few thousand?) dollars a year without anyone being the wiser. The troubles come when you start having to deal with other companies as a business entity. Then you're a business whether you like it or not.
The way my CPA puts it: the IRS expects a business to be profitable for two years out of five (I think that's the right ratio), otherwise they deem it the business a hobby, and then they get cranky about "business deductions" you might have taken. For example, if you're not making money at your business, but you're deducting your computer as a business expense, the IRS isn't going to like it.
Anyhow -- the more I type here, the more I realize I'm not qualified to answer your question. It really depends on where you're located and what you're doing, I think.