Teacher evaluation conducted by school principals is a common worldwide practice. However, there are many reservations about principals' ability to evaluate teachers reliably. Reservations appearing in the literature include inflated ratings, minimal discrimination of teacher quality, and evaluations influenced by factors irrelevant to teacher effectiveness. This article examines whether principals can distinguish effective and ineffective teachers and whether principals can identify the teacher, principal and school characteristics influencing principals' evaluations of teacher effectiveness. The sample consists of 80 school principals; data were collected from principals and teachers, combined with a database of teachers' academic performance as students in a teacher preparation program. Principals rated teachers on a number of dimensions, and data were analyzed with multiple regression techniques. Results suggest that principal ratings contain enough discriminating ability both within teachers and within dimensions of teacher effectiveness. Factors irrelevant to teacher effectiveness do not influence ratings of teachers. Results also demonstrate greater principal involvement in teacher evaluations, especially in educational systems where their role is limited.