It can be done

I know the ideal voltage for a red laser diode is 7.2 volts but whats the range of voltage I can use with a variable resistor for it to work properly. Also what type of batteries are best to use. Reason being my sister works for a flashlight company (dorcy) and i get a very healthy discount, so i was going to buy a flashlight to house my project in.

Dorcy is a good choice for a host, variable resistor is a bad choice  for controling the laser, look at dorcy builds on laser pointer forums, you will see that a regulated supply is the best way to go. either buy one or build it yourself to the design on this web site.

Regards rog8811

I know I'm actually going to use a flashlight that has to cr123 batteries and run it through a driver but i'm afraid the lm317 driver might be too big and i don't want to spend too much money on a driver or components to make one.

You can pick up the parts foe very little outlay, either in a local maplin/radioshack or from ebay, you can cut the LM317 heatsink off and save a lot of space.  Others have done it with the dorcy host. It can be done!

Regards rog8811