二人の子供が通りで遊んでいるのが目に入った。

I wonder what kind of disagreement you have with your colleague. Without that piece of information, and generally speaking, what I might say about this is that saying "I saw ..." is an English way of putting it, and we tend not say it in Japanese, unless it is important to say that it was I who saw the two kids or that I saw them as opposed to I heard them. With this in mind, I would probably translate it without referring to "I" and "saw." Of course, you should be able to fine tune the translation with more context.

It depends on what the source sentence is trying to convey.
There are a variety of ways to translate this single sentence into Japanese, and they are NOT all identical, although nuances overlap. We use various permutations in Japanese, often haphazardly and sometimes interchangeably, but as a writer (or, as a translator who writes Japanese sentences) it's good to pay attention to the differences. The list below is just off the cuff, and my notes may very well be subjective.

verb=見えた (The kids, i.e., what I saw, are the primary focus of the sentence.)
1.子供が二人、道で遊んでいるのが見えた。(emphasis evenly distributed on "two kids" "playing on the street")
2.子供が二人、道で遊ぶのが見えた。(less emphasis on "playing," more on "two kids" than the 1. above.)
3.二人の子供が道で遊んでいるのが見えた。(emphasis on the whole "scene" of what I was seeing, i.e., kids playing.)
4.二人の子供が道で遊ぶのが見えた。(more emphasis on "two kids" than the 3. above.)
5.道で遊んでいる二人の子供が見えた。(more emphasis on "two kids" and the fact that I was seeing them.)
6.道で遊んでいる子供が二人見えた。(more emphasis on "two" and the fact that I was seeing them.)
7.道で遊ぶ二人の子供が見えた。(more emphasis on "two kids" as the object of what I was seeing.)

#6 and #7 seems to be more factual as statements, the rest being more descriptive.

verb=見た (The person doing the "seeing" is the primary focus of the sentence.)
子供が二人、道で遊んでいるのを見た。
道で遊ぶ二人の子供を見た。etc.