CWBorne, that was pretty much how I envisioned it too. Real-life dictatorships don't spring up literally overnight - that was just another unrealistic, cartoony aspect of the prequels. They had to cram the formation of the Empire into one of their movies, so they did it last-minute and half-assed.
Personally, I would span it out similar to this:
Episode I - Meet Anakin, goes off to Clone Wars with Obi-Wan, starts training as Jedi
Episode II - Clone Wars have been finished for a while, in the meantime we learn that Palpatine has been vying for more power since the end of the war, Anakin has become somewhat seduced by the Dark Side of the Force and eventually turns. The movie doesn't exactly need to make it clear that Darth Vader is Anakin - we don't necessarily have to see that. This would mean that in Episode III, the character of Anakin would suddenly disappear and be replaced by this Darth Vader guy, who we then have to wait out a film before learning that he's actually Anakin.
Episode III - Empire already in place (we learn about what happened in dialogue), Rebellion wins it's first major victory against the Empire and steals the Death Star plans.
A lot of the characters and situations in Episode IV seem like they don't have much of an introduction, and spring out of nowhere, so I always felt that just as ANH focused on Luke and was "his" movie, Episode III should be "Leia's movie" and show her leading the Rebellion against the Empire. This version of Episode III would also introduce the "new" characters you'd see in the rest of the Trilogy (minus Luke, Han, and Chewie, of course...those "new characters" won't be introduced until the next film), like Leia, the Rebellion, C-3PO and R2-D2 (this would be their first appearance in the saga).