"...you can then sand it with fine sandpaper and get the shape pretty close without damaging the wood."
The danger with this technique is that sanding will give you an irregular surface. Fret tops need to be flat all the way across, so my procedure is to use a series of fine files to do all the cutting, and only then touch up with sanding.
For sanding, by the way, if you want better control than you can get with fingers, Skip's advice on the wood block is good. For finish polish in this sort of situation, though, I use foam-core nail files. They are available in grits from 100-600 at Sally Beauty Supply (they are usually around in shopping malls everywhere here in the Northeast, at least or go to their website). The 400/600 pink stick, with just a drop of mineral oil for "wet sanding" gives a great finish on a fret, with just enough "give" to form around the crown but not enough to cause lumps an bumps.