I think small children live in a world where the lines between fantasy and reality is pretty blurry; i am fairly sure (from what i can remember) that certain stories was both real and not real to me, ie. i would think of the characters as being real when i was told the stories, but if someone had asked me if the troll or whatever really sat under the bridge i would have said no because i also *knew* there was no trolls.
Similarily with santa, the easter bunny, mom playing the dangerous 'monster', etc. I can remember one christmas where i was sure santa brought presents to me, and then others where i knew it was just a game and he didnt *really* exist, but it was fun to play anyway - my point is that the transition was gradual, and i cannot remember ever feeling cheated. Even though i found out santa was not real, it was still a fun game.
Then again, I dont think my parents ever told me i had to be nice or santa wouldnt bring me presents, and its my own theory that is the only way a children will really be disappointed on finding out there is no santa: He or she will realise santa was a tool of control.
But I dont have children so this is all pretty theoretical :-).
mr bohm.