commercial product?

I've been trying to go through the GPL/LGPL and figure out if it's OK to use the Arduino IDE for commercial development. I'm working on a simple AVR board and would like to use the Arduino IDE to produce hex files that will be burned to the board via ICSP.

Is this OK to do under the license terms of the software or do I need to buy some kind of commercial license? If not, I'll have to use GCC I guess....

If your application uses any of the Arduino functions (like digital and analog read and write, delay, millis etc) then that code is subject to the licence obligations of the lesser GPL. This is a relatively lenient licence so you probably don't have much to worry about it would be prudent to get advice from someone that understands software licensing and knows what you want to do with your product.

You can read more about the LGPL licence here: GNU Lesser General Public License - Wikipedia

So... does this mean the hex file is considered a "derivative work" under the LGPL? If I make the Arduino code for the device available I'm OK? I'd almost rather do that anyways to encourage hacking.

I think your hex file would be considered a Combined Work.
'A “Combined Work” is a work produced by combining or linking an Application with the (LGPL licensed) Library.'
See item 4. Combined Works for the obligations for combined works.
http://www.gnu.org/copyleft/lesser.html