Grounded in self-determination theory, the present study examines the explanatory role of students' perceived need satisfaction and need frustration in the relationship between performance grading (versus non-grading) and students' motivation and fear in a real-life educational physical education setting. Grading consisted of teacher judgments of students' performances through observations, based on pre-defined assessment criteria. Thirty-one classes with 409 students (Mage = 14.7) from twenty-seven Flemish (Belgian) secondary schools completed questionnaires measuring students' perceived motivation, fear and psychological need satisfaction and frustration, after two lessons: one with and one without performance grading. After lessons including performance grading, students reported less intrinsic motivation and identified regulation, and more external regulation, amotivation and fear. As expected, less need satisfaction accounted for (i.e., mediated) the relationship between performance grading and self-determined motivational outcomes. Need frustration explained the relationship between performance grading and intrinsic motivation, as well as less self-determined motivational outcomes. Theoretical and practical implications are discussed.