Ok. After much experimentation, I have discoved that the best way to get the RAW to something that photoshop will import and keep (mostly) original colors. First of all, dng4ps2 works if you save as crw and let it combine the jpeg information with the crw. The resulting dngs open ok in photoshop, though I don't like how the demosaic makes a discernible pattern close up. The image looks smoother zoomed in in picasa, but I am guessing that picasa does some image smoothing techniques anyways because it uses dcraw for raw conversion and applying the same files through dcraw gives the same mosaic effect as photoshop. Its a minor nitpick though. CS3 has some pretty nice controls for importing raw and allows you to fine tune the noise levels, etc. So anything that uses dcraw will deal with the dng and you can convert it to tif or whatever. If you want to import into photoshop directly, it seems that saving in .crw and running it through dng4ps2 will work and give good color results. I don't know what happened with your example above but I got good results on my end and yeah, the color matrix in dng4ps2 seems pretty good with good color representation. Maybe something happened in the process of stripping out the dng because the example you gave above didn't look so hot. It should be noted perhaps that dng4ps2 adds exposure information (it seems at least) and the resulting pictures look darker in picassa than photoshop, but I could care less about that personally since anything I share on the web is in jpg format anyways. Oh on a side note. You can convert in picasa if you "SAVE AS" and then type tif as the extension. I've found the image quality with TIFF to be somewhat lower in the conversion for some reason. I don't know if it is the way the TIF is compressed and saved, but it certainly is not pixel pefect.
One question here though. What happens to the bad pixel feature? If you save as crw...you don't get the bad pixel subtraction, am I correct? What about the dark frame subtraction? Doesn't that do the same thing?