I've known people to have the name Mohammed... what is the problem ? It wasn't an effigy, nor was it specifically named after the prophet. As far as I knew, the class chose the name.
So, everyone gets up in arms about it, but this is okay :
Re: "Buddy Jesus," see the report at http://sweetness-light.com/archive/iraqi-muslims-outraged-over-movie-poster-mocking-jesus
The perceived infraction committed by the teacher may be dual: some interpret the Islamic prohibition upon producing or keeping images to include faithful replicas (having all identifying features) of humans and animals. Stuffed animal toys may be considered to fall into this category under some [contested] circumstances (e.g., is the replica revered, respected, honored or worshipped?). Adding "insult to injury," the possibly prohibited image -- i.e., the teddy bear -- was named after the prophet.
One only hopes that the children don't take away from this incident the lesson that the mere act of engaging in a democratic vote necessarily has negative consequences [naming the bear was a classroom exercise in learning about the vote].
-V