Never seen it happening, but as I understand it, the worm secretes thick mucus from around the clitellum, deposits eggs and sperm in the mucus, then backs out of the hardening goo like a person pulling off a tight sweater. The mucus sleeve rolls back on itself and solidifies into the familiar cocoon capsule, where the eggs and sperm mix to conceive baby worms.

Thanks Jon for the info. Hey, now that I think about it......when two worms mate, do they both lay an egg capsule??

They should, the exchange of reproductive material goes both ways.

Worms are hermaphrodites, both male and female, but they need another worm in order to mate and reproduce.