Four defective (AFM(-)) mutants of Paenibacillus sp. HKA-15 that no longer produced the peptide antifungal metabolites were developed through ethyl methane sulfonate (EMS) mutagenesis and used for in vivo experimentation. Reduced percentage of seed germination by mutants DM1 and DM2 (22.5% and 25%, respectively) and a high percent of disease incidence (69.3% and 67%, respectively) compared to wild-strain HKA-15 (80% seed germination and 27% disease incidence) indirectly indicated the role of peptide metabolite on disease suppression. Plants treated with AFM(-) clones showed stunted growth and the presence of pepperlike microsclerotia in the stem tissues. Light and scanning electron microscopic studies clearly showed the effect of peptide antibiosis on hyphal morphology. Exposure to crude extracts of antibiotics produced abnormal contraction of fungal cytoplasm, granulation, and fragmentation of hyphal mycelia and cell lysis. The presence of bacterial cells in the lumen of degrading fungal mycelium suggested a direct involvement of Paenibacillus sp. HKA-15 in the lysis of Rhizoctonia bataticola.