Several galactic black holes show transitions between spectral states. The nature of these transitions is not fully understood yet. None of the dynamical accretion disk models can fully describe spectral transitions. In this paper we present a unifying radiation transfer model that can fit the spectral data in both states. Since Cyg X-1 has the best available data, we focus here on modeling this object. We fit individual broad-band (from 1 keV up to 4 MeV) spectral data for the "hard" and "soft" states of Cyg X-1 using an emission model where a central Comptonizing corona/cloud is illuminated by the soft photon emission from a cold, outer disk that does not penetrate much in to the corona. We assume that the energy is injected to the corona by two channels: a non-thermal one that injects energetic (> MeV) electrons into the coronal region, and a thermal one that heats injected and ambient electrons once they cool sufficiently to form a Maxwellian distribution, i.e., we consider a hybrid thermal/non-thermal model. The process of photon-photon pair production is included in the model, and the number of pairs produced in the coronal region can be substantial. Using simple scaling laws for the luminosity of the cold disk, the thermal dissipation/heating rate in the corona, and the rate of energy injection from a non-thermal source, all as functions of radius of the corona, we explain the hard-to-soft transition as the result of a decrease in the size of the corona and the inner radius of the cold disk by a factor similar to 5. For the case of Cyg X-1, we show that the bolometric luminosity of the source (mass accretion rate) does not change significantly during the transition, and thus the transition is probably the result of a disk instability.