The 77-year-old coach is now under contract through the 2008 season.
Boasting the second-winningest mark in Division I-A history with a 339-109-3 record, Paterno will be entering his 55th season at Penn State and his 39th as the Nittany Lions' coach.
However, Penn State is just 22-26 in the last four seasons. Last year, the Nittany Lions endured the worst record in the program's history, finishing 3-9.
"I still enjoy coaching and I'm excited about the upcoming season and the incoming recruiting class," Paterno said. "Penn State's future is bright and we are determined to have a team which in the future will again be in the mix for a national championship."