DIY Laser Tag, Safety and Modulation questions
Answer:


All the commercial and hobby laser tag systems I have ever seen use infrared LEDs as the light source, and a simple convex lens (a magnifying glass, or similar) for focusing.  Ranges over 200m are readily achievable this way.  The group I play with specifically bans lasers for safety reasons.  Some commercial equipment does user class I lasers, but only for aiming - the signal is still IR.
Yes, the output can - and should - be modulated.  As a minimum, the sensor needs to be able to distinguish between a hit and ordinary sunlight or fluorescent lights.  If you want something more sophisticated, consider pulse code modulation or pulse width modulation.  The group I am with is currently switching to a PWM system to allow data to be transmitted rather than just a simple "hit" signal.