Parerythropodium fulvum fulvum (Forskål, 1775) is an encrusting soft coral commonly found between 3 and 40 m, at the coral reefs of the Gulf of Eilat. The annual gonadal development and sexual reproduction of this species were studied both in shallow water (3-5 m) and in the deep reef zone (27-30 m). P. f. fulvum is a dioecious species. Sex ratio of the shallow population favors higher abundance of females, while on the deep reef a 1:1 sex ratio was recorded. These differences are probably due to local aggregations of colonies of the same sex caused by asexual reproduction. Oocytes and sperm sacs are found even in very young colonies (1-3 years). The frequency of sexually mature males is higher than mature females among small corals. Young oocytes appear annually in August and within 10-11 months reach their maximal diameter. Sperm sacs start to develop later and mature after 7-9 months. A marked synchronization in the development of the oocytes and the testes exists among different polyps within each colony. Spawning occurs at dusk, and is fully synchronized by lunar periodicity (a few days after the new moon and a few days preceeding its last quarter). Fertilization takes place inside the polyp cavities. The shallow water population breeds prior to the deeper one with the whole reproductive period lasting approximately two months (end of June, beginning of August). Among anthozoans, P. f. fulvum represents a unique mode of sexual reproduction and planulae development. This species is oviparous, yet eggs cleave on the surface of the female colonies while entangled in a mucoid suspension. We term this mode of planula development "surface brooding". Within 6 days after fertilization the planulae complete their development, detach from the surface of the colony, and sink to the bottom. The encrusting growth form of P. f. fulvum is characterized by a thin coenenchyme and short polyp cavities, yet the eggs exhibit a large diameter (500-700 µm). Egg production of P. f. fulvum is rather low (18-24 eggs per polyp), but it is compensated for by surface brooding, which protects the offspring during embryogenesis. It is suggested that surface brooding is an adaptation to the encrusting shape of the colony and it maximizes fecundity.