Diffuse optical tomography (DOT) is a noninvasive imaging technology that is sensitive to local concentration changes in oxy- and deoxyhemoglobin. When applied to functional neuroimaging, DOT measures hemodynamics in the scalp and brain that reflect competing metabolic demands and cardiovascular dynamics. The diffuse nature of near-infrared photon migration in tissue and the multitude of physiological systems that affect hemodynamics motivate the use of anatomical and physiological models to improve estimates of the functional hemodynamic response. In this paper, we present a linear state-space model for DOT analysis that models the physiological fluctuations present in the data with either static or dynamic estimation. We demonstrate the approach by using auxiliary measurements of blood pressure variability and heart rate variability as inputs to model the background physiology in DOT data. We evaluate the improvements accorded by modeling this physiology on ten human subjects with simulated functional hemodynamic responses added to the baseline physiology. Adding physiological modeling with a static estimator significantly improved estimates of the simulated functional response, and further significant improvements were achieved with a dynamic Kalman filter estimator (paired t tests, n=10, P<0.05). These results suggest that physiological modeling can improve DOT analysis. The further improvement with the Kalman filter encourages continued research into dynamic linear modeling of the physiology present in DOT. Cardiovascular dynamics also affect the blood-oxygen-dependent (BOLD) signal in functional magnetic resonance imaging (fMRI). This state-space approach to DOT analysis could be extended to BOLD fMRI analysis, multimodal studies and real-time analysis.