We develop a new framework for inferring models of transcriptional regulation. The models, which we call physical network models, are annotated molecular interaction graphs. The attributes in the model correspond to verifiable properties of the underlying biological system such as the existence of protein-protein and protein-DNA interactions, the directionality of signal transduction in protein-protein interactions, as well as signs of the immediate effects of these interactions. Possible configurations of these variables are constrained by the available data sources. Some of the data sources, such as factor-binding data, involve measurements that are directly tied to the variables in the model. Other sources, such as gene knock-outs, are functional in nature and provide only indirect evidence about the variables. We associate each observed knock-out effect in the deletion mutant data with a set of causal paths (molecular cascades) that could in principle explain the effect, resulting in aggregate constraints about the physical variables in the model. The most likely settings of all the variables, specifying the most likely graph annotations, are found by a recursive application of the max-product algorithm. By testing our approach on datasets related to the pheromone response pathway in S. cerevisiae, we demonstrate that the resulting model is consistent with previous studies about the pathway. Moreover, we successfully predict gene knock-out effects with a high degree of accuracy in a cross-validation setting. When applying this approach genome-wide, we extract submodels consistent with previous studies. The approach can be readily extended to other data sources or to facilitate automated experimental design.