I see what you're saying. Desaturating it makes it look like an older film taken from a faded print, while your correction maintains the vibrancy of the colors. I wish I could make it look like that.
However, I think you hit upon the problem:
"I think the problem with the colors was that the camera never picked up the full vibrancy and muddied some of the images, especially the CG and dark scenes. I just don't know how that can be fixed. With the saturation, some of the scenes probably looked a little too sweetened to cover the lack of good color vibrancy but then desaturating them reveals the lack of good subtle color pickup in the first place. "
Your LOTR fixes work because LOTR was shot well to begin with on real film. Later, they altered it by tinting the color, but this can be reversed just about as easily. Episode II was shot on digital and looks horrible. It's not even a matter of restoring the original, natural colors; like you said, I don't think they were picked up in the first place.
"I know you added a little grain but did you do anything else besides darkening and desaturation in most scenes."
Yes, I recolored some scenes. I actually added color to the interior of Kamino because it looked so phony/perfect/CG. It's mostly more subtle than the droid factory, the balcony scene, and the sunset/dusk scenes.
There are a lot of other aesthetic difference (like the impact flashes) but overall, I just got the color of the film to a point where it was watchable for me. I wish the overall image was more colorful, but I didn't get good results when I tried that and I'm wondering whether it's even possible with this movie.
"Would boosting the midtones or contrast work?"
Not really. Although it helps. Lowering the contrast or brightening the image doesn't work either- that's what MagnoliaFan did to Episode II in an attempt to improve the overall image. It's just a very difficult thing when it was shot so badly in the first place. At one point I was even considering transfering the movie to tape after this was done and then recapture it to lose the edge. But the loss in quality would be too great.
I'll continue to experiment- maybe I'll hit upon something for the next edition. This upcoming release contains the scenes as I originally colored them, although I will go back and tweak the droid factory and the balcony.
Thank you for bringing this up, though- it's an interesting issue and it hasn't really been discussed very much
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EDIT:
I thought the cinematography on Episode I was much, much better, although special effects like Jar-Jar stick out like a sore thumb. It's also tough to tell with the current DVD transfer- I think we need a new release. I would definitely give Episode I a much less radical treatment colorwise than I did Ep. II.