It is the first one. I can understand why some people might think "That's she on the left." is correct. However, the rule is when pronouns appear as the predicate to the verb to be they are written in the objective case. Therefore, "It is me." is correct and "It is I" is wrong. Equally, you could write "I am it.", which is correct.
In your example, the "is" in "that's" is governed by "That" and not "she". Try this:
That is I on the left.
This is grammatically the same sentence. However, as I takes "am" and not "is" (like she does), it is more obvious that it is wrong.
I believe 2)"That is she on the left" is correct. "THE GREGG REFERENCE MANUAL" Tenth Edition by William A. Sabin--grammar rules mentioned that "when the pronouns appears in the predicate after some form of the verb "to be" (am, is, are, was, were)or after verb phrase containing some form of "to be"; pronouns that follow these verb forms should be in the nominative case."
Exception
"It's me is acceptable in colloquial speech and in formal writing."
Re: Re: Re: Which sentence is grammatically correct?
I don't doubt for a minute that's what it says in the manual, but I'm afraid I disagree. I have noticed that many of the leading grammar references contradict each other on a wide range of subjects. I suspect this is one too.
The nominative case's primary role is to show the subject of a verb.
It is we.
It is us.
I know which version I would use.
"You" is the same in the oblique case, so remains unaffected. "He", "she" and "it" seem like they could be governing the verb (usually "is"), so these seem okay too. It's "I" and "we" that give the game away. Using these as examples, it is clear (to me at least) that pronouns predicate to the verb to be should be in objective case.