The teacher is 100% right. Down the road, these children will learn who told the truth and who lied.
By the way, if a 7-year-old cries at learning the truth about Santa, he/she is emotionally immature.
Not so fast, oh holier-than-thou one. :)
In the December 2005 Touchstone, there is an article entitled, "Yes, Aquinas, There Is A Santa Claus", subtitled "Nathan Schlueter on a Disputation in the Scholastic Tradition." In it you will find a defense of the practice of the tradition of Santa Claus in the Christian context.
While you may not end up agreeing with the author, I think you will have to concede that the issue is frankly not as simple as you are making it. And as such, the teacher is not 100% right in presuming to know better than the children's parents what fantasies they are allowed to entertain. On the contrary, she should mind her own business.
Here is the article I was referring to:
http://www.touchstonemag.com/archives/article.php?id=18-10-011-v