The systematic analysis of factors that promote or impede physical activity in children is an urgent task for educational researchers. The present study investigated the reciprocal relationship between physical self-concept, teacher-assigned grades in physical education classes, and free-time physical activity, and analyzed positive and negative consequences of being in a class with high class-average physical ability. Data from a large, representative sample of 1,095 preadolescents from 66 classrooms were examined within a longitudinal framework. Multilevel analyses showed that membership in a class with high class-average physical ability was associated with lower physical self-concept and free-time physical activity and highlighted the significant role of teacher-assigned grades in the development of physical self-concept and physical activity. Furthermore, as predicted, there were positive reciprocal effects between physical self-concept and physical activity levels.