The Australian Rugby Union came under fire for not having offered Waugh a new contract earlier in the year when it was trying to retain some of its big name players, such as Matt Giteau, Lote Tuqiri and Mat Rogers.
But Waugh has agreed to stay with NSW until the end of the 2009 season.
"I really enjoy playing where I am at the moment, for the Waratahs and Australia and wanted to continue doing so," he said.
"It's terrific to be signed with Australian Rugby and the Waratahs through to 2009 and the important thing now is to keep performing week in week out and to be one of the best players every week."
Waugh, who has 55 Test caps and one as captain, said that leaving the Waratahs was never a consideration for him.
"I played my first season with the Waratahs in 2000 and am very much looking forward to spending 10 consecutive years playing for NSW.
"I knew I wanted to stay with the Waratahs and in NSW and was very keen to show my loyalty by not looking around elsewhere."
NSW Waratahs coach Ewen McKenzie stressed Waugh's loyalty to the Waratahs was "priceless".
"We're very excited not only because Phil has re-signed with us but by the fact that it was an uncontested decision in his mind because he wanted to be at the Waratahs," he said.
"That kind of loyalty is priceless for the organisation," he said.
However, Waugh did reveal that he was disappointed team-mate Mat Rogers didn't share the same loyalty for the Waratahs jersey.
The dual international is seeking an early release from his contract to return to rugby league with new National Rugby League team the Gold Coast Titans.
"I play the game for the team and loyalty in the jumper and when one of your team-mates doesn't have that they may as well not be there," Waugh said on Channel 10.
Waratahs hooker Adam Freier echoed Waugh's comments about Rogers.
"Rugby is a team game, and when everyone doesn't have their eyes on the prize of winning the Super 14 title then it hurts the rest of the team.
"It is no good when 15 guys run out on a team and only 14 of them want to be there."