Once your Chao is an adult, it becomes fertile; this means it can mate with other adult Chao to produce a new egg. However, adult Chao can not mate at all times. In order to mate, the adult Chao must be in its mating season.
Please note that Chaos Chao can never mate. This is because they are immortal, and have no need to reproduce. For this reason, you should think very carefully before creating a Chaos Chao; only do so if you are sure you won't want to breed it.
The natural mating season occurs a few hours after the Chao evolves. You will be able to tell when your Chao is in its mating season, as it will sit down on the ground with a heart over it's head and a ring of beautiful flowers will bloom around it. This means that it is ready and willing to mate.
If you do not want to wait for your Chao's natural mating season, then you can use a special fertility fruit instead. The Chao Adventure 2 mini game gives the opportunity to collect a fruit called the Heart Fruit. If you feed this completely to your Chao, the last bite will immediately trigger your Chao's mating season! Using this fruit, you can breed your Chao as many times as you want, whenever you want.
As you'd expect, breeding requires two Chao to mate. At least one of the Chao must be in its mating season, with flowers blooming around it. The other one must at least be close to a mating season; if it isn't in the mood, then it will refuse to mate with the other Chao. If both Chao are in their mating seasons, then they will definitely be willing to mate. The easiest way to mate two Chao is to just feed them both a Heart Fruit.
It is possible for Chao to breed on their own, if you wait long enough. However, you usually have a specific pairing in mind, and therefore want to control the interaction. To specifically breed two Chao together, just pick one of them up and place it next to the other. If only one of the Chao has flowers blooming around it, then you must pick the other one up and place it in the ring of flowers. If both Chao are willing, they will then mate.
A small ritual takes place when two Chao mate. Special music will play, and the two Chao will nuzzle each other and dance around on the flowers. After a few seconds, a brand new egg will appear between the two Chao. Congratulations! After creating a new egg, the two Chao will lose any interest in mating further. If you want to breed them again, then you will need to use Heart Fruits, or wait a very long time for another natural mating season.
By having two Chao in separate VMU's, you can connect the VMU's together and mate the Chao! Both VMU's will recieve an egg and will be stored in your VMU until you decide to take it out into your garden! The Chao you have mated with will have its details stored in the "Friend" section of the mini game. The VMU can only hold a maximum of one Chao and one egg.
It seems as though on the Dreamcast, the newly created Egg will hatch a Chao with the colour of one of the parents. Pretty simple, but not much is know about this due to the difficulty in obtaining the Jewel Chao in the first place! I will play around with the editor one day, or if you know of any information, please let us know.