I have used this method to produce smoke bombs that work very well.
http://www.skylighter.com/mall/chemicals.asp?fl=search#CH5302Potassium Nitrate [KN03] is the chemical you will need to buy. There is a minimum order of 5lbs, but it's worth it.
You want to heat that stuff with a 3/2 Ratio (Kn03:Sugar) over a low flame. Too hot, and it will burn. You want a molasses like substance.
When you are on that site, pick up some visco or magnesium fuse. I used paper towel rolls cut in half for the barrel of the grenade. Working with the stuff is tricky, because its very hot and gets hard fast.
If you have done it right, it should burn really well, and produce a great amount of smoke!
(Note: Make a series of small batches, the more you make each batch, the more difficult it is to cook and work with.)
Post back with further questions, I wrote this as I was pretty tired, and I probably misses something...