Iago claims that he was sleeping near Cassio and then while Cassio was asleep he basically started cuddling with Iago. After a little bit he then started talking in his sleep about the things he was doing with a woman and Iago tells Othello that he was talking about Desdemona and all the times that he slept with her and that he was going to sleep with her. This of course serves to further enrage Othello and deepen his suspicion that Desdemona is being unfaithful to him with his lieutenant Cassio.
Iago claims that Cassio was muttering in his sleep, saying that he loved Desdemona:
And he kisses him and cuddles him.
"Oh my love, how I love you indeed"