I did the resize to a 128MB image, but that doesn't seem to be the right approach:
$ df -h
Filesystem Size Used Avail Capacity Mounted on
/dev/ufs/pfSense 112M 73M 30M 71% /
devfs 1.0K 1.0K 0B 100% /dev
/dev/md0 38M 162K 35M 0% /tmp
/dev/md1 19M 4.1M 14M 23% /var
/dev/ufs/pfSenseCfg 1.7M 179K 1.4M 11% /cf
For some reason 73MB shows 'used' after resizing, so that's a stumbling block (I could resize it larger), but the update process didn't even attempt to use a non-RAM-disk storage, so I don't suppose resizing larger would make any difference.
I put some notes/scripting on how to do a resize using VirtualBox here:
http://bfccomputing.com/downloads/pfsense/get-resize-image.sh
if anybody else is trying this without a BSD host.
Does anybody know what the planned strategy is for updating embedded on 2.0? Given parts prices, I'd think having a larger default embedded image size with a tmp filesystem on flash would work for most people. Even in CF, there doesn't seem to be much price difference between 64MB and 1GB parts, at least from some quick Googling.