The intention of this paper is to show how the methods of nonlinear factor analysis as developed by McDonal (Br. J. Math. Stat. Psychol.20:205-215, 1967) can be used to study genotype-environment interaction. The method is applied to the interaction of genotype and within-family environmental influences. Simulated twin data are used to illustrate how this type of interaction may be detected and estimated. It is shown that estimates of genetic influences are not affected by G×E interaction. © 1987 Plenum Publishing Corporation.