I have a SanDisk 1GB CF with pfSense-1.2.3-1g-20091011-1525-nanobsd.img written using physdiskwrite.exe. It works. Manual firmware upgrade using pfSense-1.2.3-1g-20091013-1602-nanobsd-upgrade.img.gz (still compressed) from the web GUI fails.
Diagnostics > NanoBSD > ad0s1 to ad0s2 [Duplicate slice]
Now manual firmware upgrade works.
If the duplicate slice is a known requirement, I recommend pre-duplicating the slice in the nanobsd new installation images so the step can be skipped by the user for the first upgrade. Subsequent upgrades should not matter as long as the slice to be written to is compatible with the upgrade firmware.