Recent research has demonstrated that cortical motor areas are engaged when observing motor actions of others. However, little is known about the possible contribution of the motor system for evaluating the correctness of others' actions. To address this question we designed an MEG experiment in which subjects were executing and observing motor actions with and without errors. In the execution task subjects were asked to make speeded button presses according to instruction cues. During the observation task, they viewed pictures of an actor's hand making button presses which were correct or incorrect according to the cues. Time-frequency representations of the MEG data demonstrated a depression in oscillatory activity in the beta band activity (15-35 Hz) during execution followed by a beta rebound that was stronger for incorrect compared to correct executions. During the observation task, a similar time-course of the beta activity was identified and importantly the modulations were stronger for the observation of incorrect than correct actions. Sources accounting for the difference in beta activity between correct and incorrect actions were localized using a beamforming technique. Both for the execution and observation conditions sources were identified to the dorsal motor areas comprising both primary and pre-motor cortex. Our findings demonstrate that not only is cortical motor activity modulated by action observation, but the modulation increases when the observed action is erroneous. This suggests that the motor system is engaged in evaluating the correctness of the actions of others.