Of course the small quantity of IR radiation a few LEDs will produce has no adverse effects for you eyes or anything else. Just like visible light, it takes a lot to damage your eyes. That's why there can be so many products using IR LEDs (webcams, TrackIR, remote controls)... if they were hazardous to your health would they wouldn't be on the market in the first place.
The reason IR LED cap/clip/whatever are used more than IR reflectors is very simple: they're much more effective. Reflectors will only bounce back a small quantity of the IR light. LEDs provide better tracking and are less susceptible to parasite radiation sources (although an incandescent bulb right behind you will still mess up things big time).
PS: another happy Freetrack user here. You should know that for 2 axis movement (2DOF if you wish) you only need a single LED. But why settle for that when you can have 6DOF with 3 LEDs. In other games, of course
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