The cell free culture filtrate of Bacillus cereus associated with an entomopathogenic nematode, Rhabditis (Oscheius) sp. exhibited strong antimicrobial activity. The ethyl acetate extract of the bacterial culture filtrate was purified by silica gel column chromatography to obtain four bioactive compounds. The structure and absolute stereochemistry of these compounds were determined based on extensive spectroscopic analyses (FABMS, (1)H NMR, (13)C NMR, (1)H-(1)H COSY, (1)H-(13)C HMBC) and Marfey's method. The compounds were identified as cyclic dipeptides (CDPs): cyclo(L-Pro-L-Trp), cyclo(L-Leu-L-Val), cyclo(D-Pro-D-Met), and cyclo(D-Pro-D-Phe), respectively. Compounds recorded significant antibacterial activity against all the test bacteria (Staphylococcus epidermidis, Staphylococcus aureus, Klebsiella pneumoniae, Escherichia coli, Pseudomonas aeruginosa and methicillin-resistant S. aureus) except cyclo(L-Leu-L-Val). Cyclo(L-Leu-L-Val) recorded activity only against Gram positive bacteria. Best antibacterial activity was recorded by cyclo(L-Pro-L-Trp) against S. aureus (4 μg/ml). The four compounds were active against all the five fungi tested (Trichophyton rubrum, Aspergillus flavus, Candida albicans, Candida tropicalis and Cryptococcus neoformans) and the activity was compared with amphotericin B, the standard fungicide. The highest activity of 1 μg/ml by cyclo(L-Pro-L-Trp) was recorded against T. rubrum, a human pathogen responsible for causing athlete's foot, jock itch, and ringworm. The activity of cyclo(L-Pro-L-Trp) against T. rubrum, C. neoformans and C. albicans were better than amphotericin B, the standard antifungal agent. To our knowledge, this is the first report of antifungal activity of CDPs against the human pathogenic fungi T. rubrum and C. neoformans. The four CDPs are nontoxic to healthy human cell line up to 200 μg/ml. We conclude that the bacterium associated with entomopathogenic nematode is promising sources of natural antimicrobial secondary metabolites, which may receive greater benefit as potential sources of new drugs in the pharmaceutical industry.