OK - found my own answer, courtesy of John Isner:
This could do with being more prominent in the Moodle 2.0 documentation, perhaps,
I have give them the appropriate permissions in the "teacher" settings.
By overriding the Teacher role, you gave your teachers permissions that they have no way of using. That's because the Teacher role is assigned in the Course context, while the things you want to enable them to do (like create new accounts and edit profiles) are in the System context.
Create a NEW role with just the needed permissions and assign it to selected users using Site administration -> Users -> Permissions -> Assign System roles. Then reset the Teacher role using the Reset to defaults button.