b) A joke used to make anything sound sexual.
She, being the imaginary girl he *supposedly* had "it" with.
She said, meaning what she said during the process of his *imaginary* sexual intercourse.
Teacher: Bob, give it to me, it's mine!
Boy: That's what she said!
Boy 1: Ew man! Look, I got it all over me!
Boy 2: Woah dude, you're gonna have to rub this all over it!
Boy 3: THAT'S WHAT SHE SAID!