I'm sure this was a very awkward situation for you, them and their children! I am also sure that you are not the first, and will not be the last people that they have witnessed this couple fighting. Clearly they have VERY poor boundaries: not only do they have serious fights in front of their kids, but in front of other people too.

There is lots of evidence that consistent, bad fighting in front of children is awful for their emotional health, however, the question is whether you are willing to risk losing the friendship by bringing up the discussion. Their is a very strong possibility that this will be the result of a conversation, no matter how sensitive you are, because one or both of your friends will feel uncomfortable that you have pointed out their flaw, will not want to risk you witness it again, will be defensive and in denial, and will consider you a busy body--or all of the above!  

Of course, if you are uncomfortable being around them, you should limit your time with them, which might make them consider the impact of their behavior on you--if not on their children. If you aren't worried about losing the friendship, then I'd suggest that you speak to them about what you experienced. Focus on your exerience, rather than lecturing them about poor parenting--this might be better heard by them. Be sympathetic, rather than disapproving and ask how you can help. Good luck!
Good Wishes and Great Parenting,
Dr Susan Bartell
JustAsk Expert
www.drsusanbartell.com
Twitter @drsusanbartell
NEW book “The Top 50 Questions Kids Ask”

That is a tough predicament.  I think if you were respectful and gentle you could point out that the children were affected by their arguing and you only bring it up because the faces they made left you uncomfortable and you just wanted to point it out to them since they were preoccupied with the fight and all.  I would also specifically mention that I wasn't telling them how to parent at all--just offering a different perspective that they weren't able to see since they were busy fighting.

It does sound like they are both stressed and just lashing out at each other so maybe you could help by "freeing" mom of the kiddos once a week for an hour or two while she ran errands, took a bath, napped, so on and so on.  I feel when you make a stake in someone's future, they don't take your criticism as harshly.  This kind of comes off as you aren't criticizing as much as you are providing a solution to a problem...you aren't being a backseat driver, to put it simply.

At any rate, be mindful of what you say, how you say it, and be prepared for them to skew your good intentions due to lack of coping abilities.  Good luck.