Paterno, in his 46th season as Penn State's head coach, will not be charged, authorities said.
In a four-page release, the Attorney General's Office said Paterno was informed by a graduate-assistant football coach in March 2002 that he had seen Sandusky involved in sexual activity with a boy in the showers of the Lasch Football Complex, where Sandusky maintained an office after his retirement.
"Paterno testified that he then called [Curley] and met with Curley the following day," the release said, "explaining that a graduate assistant had reported seeing Sandusky" involved in the activity.
Sources told the Harrisburg Patriot-News that prosecutors believe Paterno did the right thing. The newspaper also reported that Paterno will testify for the prosecution at Sandusky's trial.
Paterno, 84, the all-time winningest coach in Division I football, had no comment Saturday, athletic department spokesman Jeff Nelson said.
However, Paterno may not be completely in the clear. Twenty of the 40 crimes with which Sandusky is charged allegedly took place during the time he worked for Paterno, including three counts of involuntary deviate sexual intercourse, a first-degree felony.
One accuser, now 27, testified that Sandusky initiated contact with a "soap battle" in the shower that led to multiple instances of involuntary sexual intercourse and indecent assault at Sandusky's hands, a grand jury report said.
He said he traveled to charity functions and Penn State games with Sandusky, even being listed as a member of the Sandusky family party for the 1998 Outback Bowl and 1999 Alamo Bowl. But when the boy resisted his advances, Sandusky threatened to send him home from the Alamo Bowl, the report said.
Defense attorney Joe Amendola said Sandusky has been aware of the accusations for about three years.
"He has denied the allegations from the outset," Amendola told the New York Times.
After Sandusky was arraigned, Amendola told WJAC-TV that his client was "shaky, as you can expect.
"Being 67 years old, never having faced criminal charges in his life, and having the distinguished career that he's had, these are very serious allegations," he said.
In a statement, Penn State president Graham Spanier called the allegations "troubling" but added that Curley and Schultz "have my unconditional support."
"I have complete confidence in how they have handled the allegations about a former university employee," Spanier said. "Tim Curley and Gary Schultz operate at the highest levels of honesty, integrity, and compassion. I am confident the record will show that these charges are groundless and that they conducted themselves professionally and appropriately."
Curley and Schultz are expected to surrender Monday in Harrisburg for their preliminary arraignment. They will be tried in Dauphin County. Sandusky's trial will take place in Centre County.
Curley and Schultz were not available for comment Saturday, but their attorneys, in separate statements, proclaimed them "innocent of all charges."
"We will vigorously challenge the charges in court and we are confident he will be exonerated," said Caroline Roberto, Curley's attorney.
Sandusky, of State College, Pa., worked with at-risk children through the Second Mile, a charitable organization he founded in 1977. Prosecutors said the eight boys who were the targets of sexual advances or assaults between 1994 and 2009 first met Sandusky through the organization.
The attorney general's release said that after Paterno informed Curley of what he had been told about Sandusky's alleged assault, Curley waited approximately a week and a half before meeting with the graduate assistant.
"Despite a powerful eyewitness statement about the sexual assault of a child, this incident was not reported to any law enforcement or child protective agency, as required by Pennsylvania law," Attorney General Linda Kelly said.
Kelly said Curley and Schultz agreed that Sandusky would be told he could not bring any more Second Mile children into the Lasch building, a ban that she said was "reviewed and approved" by Spanier "without any further inquiry on his part."
The release said the grand jury found that "Curley committed perjury in repeatedly denying that he had ever been told that Sandusky had engaged in sexual misconduct with a child." It said Schultz asserted the allegations concerning Sandusky were "not that serious" and that he and Curley "had no indication a crime had occurred," which contradicted other testimony.
Kelly said the failure of top university officials to act on reports regarding Sandusky "allowed a predator to walk free for years, continuing to target new victims."
"Equally disturbing is the lack of action and apparent lack of concern among those same officials, and others who received information about this case, who either avoided asking difficult questions or chose to look the other way," she said.
Curley, a 1976 Penn State graduate, has been athletic director since December 1993 and oversees the university's 29 varsity sports. He worked for Paterno as a graduate assistant and recruiting coordinator before he was named assistant to the athletic director in 1981.
In June, Curley received the John L. Toner award from the National Football Foundation, a prestigious award among college athletics administrators, for "superior administrative abilities and outstanding dedication to college athletics and particularly college football."
Schultz, who oversees Penn State's police department as part of his duties, retired from his position in 2009 but was brought back on an interim basis while a search was being conducted for a replacement.
Read the grand jury report at www.philly.com/
Contact staff writer Joe Juliano at 215-854-4494 or firstname.lastname@example.org.
This article contains information from the Associated Press.