I don't really like the whole "better watch out" thing. Not to be self righteous because I've already let it slip out of my mouth. Sometimes Santa doesn't bring kids exactly what they want and there will be a time when your child discovers that another child did not get presents for various reasons. Some kids will get a lot and some will get a little. So was the little boy who got the Play Station III with all the games and accessories, a electric scooter, and whatever all the hot toys are this year better than the little boy who only got a skateboard because his parents couldn't afford more? How do you explain how the kid who always gets into trouble got more than the kid who is quiet and never bothers anyone, but never seems to have anything? It's hard enough to answer these questions when your child comes to you with them without "naughty or nice" coming into play.
When I was little my parents told me that Santa was "the gifts under the tree". I didn't understand what they were talking about until I knew there was no Santa. I kind of like that explanation, but I think I'll tweak it a little. Santa is the spirit of giving.
My son is too little for us to have to worry about this yet, but I have several friends who have different opinions (between mom & dad) on whether to "do" Santa Claus...in one case, when the husband was little and found out that Santa couldn't be believed in, then he also didn't want to believe in God- yikes! Others just feel that they wouldn't lie to their kids about other things, so why would they lie about this? I guess I wouldn't tie it to discipline; it seems like the kids would feel even more betrayed in that case. Laura, you make good points!
I "believed" in Santa as a child, and my children did, too. I don't think I necessarily "taught" them to believe, and it wasn't used as a bribe, but it was so much fun! We also did the Easter bunny and tooth fairy things. I miss those days!