I have never experimented with this myself yet, but, I would just use a plane for both the grenade and the explosion. Since you won't see much of the grenade during the toss except a little black circle, you can just use this and texture it with a black circle.
For the explosion, just use a plane as well. It'll save on using 3d objects for something that you won't really notice in 3D in the first place. So, if you animate the plane (or sprite) with an explosion, and rotate it so that it is always facing the camera, I'm sure it'll look good enough. You could even use a couple of planes to get a more layered effect.
Many games, ie: Oblivion use planes for effects such as fire and explosions.
For shaders, I'm not that good myself, but I know there are many tutorials online, and there is a thread at the top for help on shaders. They can be extremely tricky.
www.myspace.com/norseblod
