blocky results in out of focus "background" areas

In a sense, this blocking effect is kind of "unavoidable", in particular when the source is grainy and the encoder can't reproduce the grain because of too low bitrate. And the necessary bitrate for grain reproduction is quite high. for a short explanation (or a try of, at least;)). Shortly: with those rather low bitrates that we got used to by the modern compression schemes, grain just can't be dealt with properly. That's why in h.264 the scheme of adding parametric grain was included: Coding grain "directly" is too expensive.

You still haven't given a shot to adding noise...

I may have missed it, but what method do you recommend to do so?

gradfun has already been advised ( you can use it with a recent ffdshow build ). FFDshow also have several (faster) noise generators, because gradfun is a bit CPU intensive during playback. You can also add noise with mplayer.

Oh, sorry, I meant how can I do it hardcoded? The target output will be on by a HTPC (mplayer). Thanks!

I tried the noise filter in FFDshow, and although it did improve the area of interest, it ruined the overall quality of the video :)