Cyanobactins are a rapidly growing family of linear and cyclic peptides produced by cyanobacteria. Kawaguchipeptins A and B, two macrocyclic undecapeptides reported earlier from Microcystis aeruginosa NIES-88, are shown to be products of the cyanobactin biosynthetic pathway. The 9 kb kawaguchipeptin (kgp) gene cluster was identified in a 5.26 Mb draft genome of Microcystis aeruginosa NIES-88. We verified that this gene cluster is responsible for the production of the kawaguchipeptins through heterologous expression of the kgp gene cluster in Escherichia coli. The KgpF prenyltransferase was overexpressed and was shown to prenylate C-3 of Trp residues in both linear and cyclic peptides in vitro. Our findings serve to further enhance the structural diversity of cyanobactins to include tryptophan-prenylated cyclic peptides.