Gene–environment interaction is likely to be a common and important source of variation for complex behavioral traits. Often conceptualized as the genetic control of sensitivity to the environment, it can be incorporated in variance components twin analyses by partitioning genetic effects into a mean part, which is independent of the environment, and a part that is a linear function of the environment. The model allows for one or more environmental moderator variables (that possibly interact with each other) that may i) be continuous or binary ii) differ between twins within a pair iii) interact with residual environmental as well as genetic effects iv) have nonlinear moderating properties v) show scalar (different magnitudes) or qualitative (different genes) interactions vi) be correlated with genetic effects acting upon the trait, to allow for a test of gene–environment interaction in the presence of gene–envi-ronment correlation. Aspects and applications of a class of models are explored by simulation, in the context of both individual differences twin analysis and, in a companion paper (Purcell & Sham, 2002) sibpair quantitative trait locus linkage analysis. As well as elucidating environmental pathways, consideration of gene–environment interaction in quantitative and molecular studies will potentially direct and enhance gene-mapping efforts.