The correct sentence is "They were playing outside when it started raining." "Were" is the past continuous tense, used for ongoing actions in the past.

Understanding the Correct Answer: "Were" (Option C)
The sentence "They ____ playing outside when it started raining" requires a verb that fits the context of an ongoing action in the past. The correct option is "were," making the complete sentence: "They were playing outside when it started raining."
Explanation of the Options:
- a) Is
- "Is" is present tense, indicating an action happening now.
- b) Am
- "Am" is also present tense and can only be used with "I," not "they."
- c) Were
- "Were" is the past tense form of "are" and is used for plural subjects like "they." It indicates that the action of playing was ongoing in the past.
- d) Be
- "Be" is an infinitive form and does not fit the sentence structure.
Why "Were" is Correct:
- Past Continuous Tense:
- The phrase "were playing" is an example of the past continuous tense, which describes actions that were happening at a specific time in the past.
- Context of the Sentence:
- The phrase "when it started raining" indicates a specific moment in the past that interrupted the ongoing action of playing.
Conclusion:
In summary, "were" is the correct choice because it accurately conveys the ongoing action of "playing" that was happening before the interruption of rain, fitting the context of the sentence perfectly.