Complex phenotypes such as the transformation of a normal population of cells into cancerous tissue result from a series of molecular triggers gone awry. We describe a method that searches for a genetic network consistent with expression changes observed under the knock-down of a set of genes that share a common role in the cell, such as a disease phenotype. The method extends the Nested Effects Model of Markowetz et al. (2005) by using a probabilistic factor graph to search for a network representing interactions among these silenced genes. The method also expands the network by attaching new genes at specific downstream points, providing candidates for subsequent perturbations to further characterize the pathway. We investigated an extension provided by the factor graph approach in which the model distinguishes between inhibitory and stimulatory interactions. We found that the extension yielded significant improvements in recovering the structure of simulated and Saccharomyces cerevisae networks. We applied the approach to discover a signaling network among genes involved in a human colon cancer cell invasiveness pathway. The method predicts several genes with new roles in the invasiveness process. We knocked down two genes identified by our approach and found that both knock-downs produce loss of invasive potential in a colon cancer cell line. Nested effects models may be a powerful tool for inferring regulatory connections and genes that operate in normal and disease-related processes.