I am really sorry about dragging this question out, but I really need your help because this is the thing that makes me put an end to struggling with English grammar.

"I was sad when I saw kids sleeping on the streets."
1) I was sad when I saw kids
who were sleeping on the streets.
2) I was sad when I saw kids
sleeping
on the streets like 'I see you
sleeping.'
I think that either one is a possible way of interpreting the example and in this case, there is not much difference in meaning. What do you native English speakers think? Please give me power and help me out again.