Objective: To determine the levels of physical activity (PA), lesson context and teacher interaction students receive during physical education (PE) in secondary schools in New South Wales, Australia. Design: Baseline cross-sectional study. Methods: Systematic direct observation of Year 7 PE classes over a six-month period. Eighty one (81) PE lessons across six schools were observed. Results: The mean (SD) percentage of class time spent in moderate to vigorous physical activity (MVPA) was 56.9% (18.7). However, only 60% of the 81 met the recommended 50% of class time spent in moderate to vigorous physical activity (MVPA). Just over 6% of class time was spent in skill instruction. Game play made up nearly half of the lesson context (44%) and teachers spent just under one-third (31%) of class time promoting PA. Conclusions: Substantial variations in the PA, lesson context and teacher interaction exist within PE. As a large proportion of classes, especially girls' only classes, did not meet the Centers of Disease Control and Prevention (CDC) recommendation of 50% of class time in MVPA, ways need to be found to promote PA in PE classes. Levels of skill instruction and practice were well below international comparisons and may have implications for PA participation later in life. Numerous possibilities exist for improving PE in Australia as a way of improving the activity levels and experiences of our young people.