Background: Despite the increased risk of depression and conduct problems in children of depressed parents, the mechanism by which parental depression affects their children's behavioral and emotional functioning is not well understood. The present study was undertaken to determine whether parental depression represents a genuine environmental risk factor in children's psychopathology, or whether children's depression/conduct can be explained as a secondary consequence of the genetic liability transmitted from parents to their offspring. Methods: Children of Twins (COT) data collected on 2,674 adult female and male twins, their spouses, and 2,940 of their children were used to address whether genetic and/or family environmental factors best account for the association between depression in parents and depression and conduct problems in their children. Data collected on juvenile twins from the Virginia Twin Study of Adolescent Behavioral Development (VTSABD) were also included to estimate child-specific genetic and environmental influences apart from those effects arising from the transmission of the parental depression itself. The fit of alternative Children of Twin models were evaluated using the statistical program "Mx." Results: The most compelling model for the association between parental and juvenile depression was a model of direct environmental risk. Both family environmental and genetic factors accounted for the association between parental depression and child conduct disturbance. Conclusions: These findings illustrate how a genetically mediated behavior such as parental depression can have both an environmental and genetic impact on children's behavior. We find developmentally specific genetic factors underlying risk to juvenile and adult depression. A shared genetic liability influences both parental depression and juvenile conduct disturbance, implicating child conduct disturbance (CD) as an early indicator of genetic risk for depression in adulthood. In summary, our analyses demonstrate differences in the impact of parental depression on different forms of child psychopathology, and at various stages of development.