The shells are not used in making peanut butter. You would need to shell these peanuts (and remove the papery skins from the individual peanuts) before grinding them to make the peanut butter.
It doesn't matter whether they are roasted in the shell or not--what matters is that they are roasted, to give the deeper, richer flavor.
I have to assume your peanut vendor did not mislead you, and therefore the peanuts you bought are already roasted. You would just shell them and grind them. Note: if they are roasted, they will be somewhat crunchy, with a toasty complex aroma, and light medium beige to brown color, whereas raw (or "green") peanuts will be closer to very pale yellowish beige, like unfinished lumber.
Due to the large number of peanuts that may be used in making a reasonable quality of peanut butter, and the inconvenience of shelling those peanuts, one might choose to purchase already shelled, roasted, preferably unsalted peanuts for the purpose.
Edit: in response to the second question, I defer to the mighty Alton Brown whose recipe indicates to roast peanuts at 350 F for 30-35 minutes. Since he doesn't give us a test or indicator to know when they are done, and a careful and meticulous recipe writer such as Brown would not omit this if one exists, I infer no good test for doneness of the in-shell peanuts exists.
However, since the individual peanuts within the shells are very uniform in size, the time and temperature guideline is likely to be quite effective.
You should almost certainly be smelling roasty peanut aromas as the peanuts close in to being done, but there is no way to describe that. Its like knowing when a cake is done by the aroma--its certainly possible, but you have to have experience with the recipe to know.
The previous answer which says to toast something means to brown it is accurate. The difference between roast and toast is simple, really: roast means to expose something to dry heat (in the west, usually in an oven) and to cook whatever it is right through; toast means to brown the outside of something, either held over a fire (as in marshmallows) or placed under a dry heat source such as a grill or inside a toaster.
In practice, for your peanuts, its a lot easier to roast them than it is to grill them to get a toasted effect, but toasted should mean you put them under a grill and shake them about to brown them all over rather than 'cook' them right through. The risk with toasting under the grill is, obviously, burning - I've 'toasted' cashews in a hot oven by shaking them about a bit periodically for a short time, and I've also done it in a dry pan on the hob. The only time I did it under the grill, I burnt the lot...
Best Answer
That great taste comes from the compounds produced by the Maillard reaction. It not one reaction but many that occur when the building blocks of proteins and sugars react as food is heated. Many new compounds are produced giving the cooked food a richer range of flavors. The pyrazines produced by the Maillard reaction give roasted peanuts their characteristic aroma, in particular cyclohexapyrazine.
To produce pyrazines, you need to heat your peanuts above 70C, with 110C to 170C (230F - 340F) suggested by most cookbooks. For unshelled peanuts at 110C it can take up to ten minutes for the amount of pyrazines produced to reach its peak. If the peanuts are not dry, you may need to add up to 20 minutes of oven time (longer on a tawa) at a lower temperature to dry them. Color will be your guide. The flavor of the pyrazines will be masked by oxidizing oils in the peanuts, so keeping them in an airtight container helps preserve that nutty-cracker-peanut flavor.