McQueary, a graduate assistant football coach at the time, said the incident occurred one night when he had returned to the Lasch football building on campus, the Centre Daily Times reported.
McQueary testified he heard "skin on skin" slapping sounds emanating from the shower and then saw Sandusky with his arms around the boy, who was up against a shower wall.
"You don't expect to see anything like that ever," McQueary said.
McQueary said he slammed his locker and the two separated and made eye contact with him, the State College, Pa., newspaper said.
Earlier in the day, the teen whose accusations led to the sexual abuse case against Sandusky offered graphic testimony.
The young man, now 18, identified in court documents as "Victim 1," said the physical relationship began when he was 11 with hugging and back-cracking, eventually progressing to forced oral sex, the Daily Times said.
A school counselor in whom he eventually confided didn't believe the accusations, he said.
The young man also said Joe Miller, a coach at Central Mountain High School in Mill Hall, once saw Sandusky and him rolling around on the floor.
The witness, under questioning from the defense, denied he was seeking financial gain.
It was the accusations of "Victim 1" that led to the case against Sandusky. Investigators went on to trace Sandusky to at least 10 other purported victims, lead prosecutor Joseph McGettigan said Monday in his opening statement in the Centre County courtroom in Bellefonte, Pa.
Sandusky, 68, has denied allegations he abused at least 10 boys during a 15-year period. Prosecutors maintain he met his victims through The Second Mile, the charity he founded for underprivileged youth in 1977, and abused many of them on the Penn State campus.
Defense attorney Joseph Amendola has suggested Sandusky's accusers conspired to ruin his reputation for financial gain.