It's a joke that turns something that some one says into a a sexual saying.
For example:
Thomas:
Look at my long stick
Gary:
Thats what she said!
Teacher:
I know that the homework looks hard and long but you have to go all the way!
Lucas:
That's what she said
green,and red well thats thats she said. \
green,and red well thats thats she said. \
thats what she said
its small (thats what she said XD)
thats what she said
he has 2 legs and thats how much legs he has and he is small thats what she said
thats not what your mama said last night
Thats what she said. hehe lol
thats what ya mum said
Hour thats what my teacher said at least
Thats what Socrates said
because i said so thats why