Recently, the practice of tracking has been receiving more attention by both educators and researchers and some have questioned the policy merit. One of the strongest arguments against tracking is that is creates homogeneous classes according to ability and, therefore, reduces the positive spillover effect referred to as peer effect. While peer effects have been found to be an important input into the production of education, no study has specifically examined whether these effects are more or less prevalent in classes where tracking occurs. Utilizing individual student level data, this current research examines whether the peer effect occurs in cases in which tracking is present. The results suggest that the use of tracking diminishes the impact peers have on student achievement for low- and average-level ability while the peer effect is unaffected by tracking for high-ability students.