As hermaphrodites, leeches have both male and female sex organs... Mating involves the intertwining of bodies where each deposits sperm in the others' clitellar area... The clitellum secretes a tough gelatinous cocoon which contains nutrients, and it is in this that the eggs are deposited... The cocoon is either buried or attached to a rock, log or leaf and dries to a foamy crust. After several weeks or months, the young emerge as miniature adults. Studies show that the cocoons are capable of surviving the digestive system of a duck.
The photo above shows the cute little newborns emerging from a cocoon. Cootchie-cootcie-coo! The leeches are fed slaughterhouse blood until their distribution to medical clinics, where they may be stored in pretty pink jars.
Links for the photo album and the biology.