Living systems have to constantly sense their external environment and adjust their internal state in order to survive and reproduce. Biological systems, from as complex as the brain to a single E. coli cell, have to process these data in order to make appropriate decisions. How do biological systems sense external signals? How do they process the information? How do they respond to signals? Through years of intense study by biologists, many key molecular players and their interactions have been identified in different biological machineries that carry out these signaling functions. However, an integrated, quantitative understanding of the whole system is still lacking for most cellular signaling pathways, not to say the more complicated neural circuits. To study signaling processes in biology, the key thing to measure is the input-output relationship. The input is the signal itself, such as chemical concentration, external temperature, light (intensity and frequency), and more complex signals such as the face of a cat. The output can be protein conformational changes and covalent modifications (phosphorylation, methylation, etc), gene expression, cell growth and motility, as well as more complex output such as neuron firing patterns and behaviors of higher animals. Due to the inherent noise in biological systems, the measured input-output dependence is often noisy. These noisy data can be analysed by using powerful tools and concepts from information theory such as mutual information, channel capacity, and the maximum entropy hypothesis. This information theory approach has been successfully used to reveal the underlying correlations between key components of biological networks, to set bounds for network performance, and to understand possible network architecture in generating observed correlations. Although the information theory approach provides a general tool in analysing noisy biological data and may be used to suggest possible network architectures in preserving information, it does not reveal the underlying mechanism that leads to the observed input-output relationship, nor does it tell us much about which information is important for the organism and how biological systems use information to carry out specific functions. To do that, we need to develop models of the biological machineries, e.g. biochemical networks and neural networks, to understand the dynamics of biological information processes. This is a much more difficult task. It requires deep knowledge of the underlying biological network - the main players (nodes) and their interactions (links) - in sufficient detail to build a model with predictive power, as well as quantitative input-output measurements of the system under different perturbations (both genetic variations and different external conditions) to test the model predictions to guide further development of the model. Due to the recent growth of biological knowledge thanks in part to high throughput methods (sequencing, gene expression microarray, etc) and development of quantitative in vivo techniques such as various florescence technology, these requirements are starting to be realized in different biological systems. The possible close interaction between quantitative experimentation and theoretical modeling has made systems biology an attractive field for physicists interested in quantitative biology. In this review, we describe some of the recent work in developing a quantitative predictive model of bacterial chemotaxis, which can be considered as the hydrogen atom of systems biology. Using statistical physics approaches, such as the Ising model and Langevin equation, we study how bacteria, such as E. coli, sense and amplify external signals, how they keep a working memory of the stimuli, and how they use these data to compute the chemical gradient. In particular, we will describe how E. coli cells avoid cross-talk in a heterogeneous receptor cluster to keep a ligand-specific memory. We will also study the thermodynamic costs of adaptation for cells to maintain an accurate memory. The statistical physics based approach described here should be useful in understanding design principles for cellular biochemical circuits in general.