I think flares are a marvelous idea, although it all boils down to difficulty for the Inf team. If it's too difficult for them to implement then it won't happen. I don't know the first damn thing about C programming so I can't venture even an educated guess as to how hard it would be to include flares. However, if it's feasible I'd really like to see them. Maybe not quite as complex as a parachute rocket, but as a very bright light source that has some non-complex physics of hanging in the air and slowly drifting to earth. Of course if you were to fire it into a darkened room, it would sit on the ground and burn, illuminating the entire room.
As to the question about arming, yes the M203 also does this because the barrel is rifled. This imarts spin to the projectile which, by centrifugal force, arms itself by spinning several hundred thousand RPMs (no, that's not a typo). coffeycan brings up an excellent point that had never even crossed my mind - if you shoot the HK69 at a close range, the grenade should NOT explode. This was modelled quite nicely in Delta Force by Novalogic.
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Gryphon/JTF2
Striving for Excellence in Small Arms Data
=JTF2= Infiltration Server Info