An improved 2004/05 season which saw the Tyrone men finish seventh and ten points away from the play-offs, has seen Davidson bring on a number of the club's young talents.
Indeed, four Dungannon players, including fly-half Gareth Steenson were named recently in the Ireland Under-21 squad to travel to the IRB World Cup next month in Argentina.
Dungannon chairman, Billy Boles said of the announcement: "The club is extremely pleased and encouraged by the impact Jeremy has made during his first two years at the club.
The 31-year-old Davidson, whose international career was cut short in 2001 due to injury, added: "It has been tough at times during the past two years, but a lot of the things I wanted to develop did and I now have an opportunity to continue with that work.
"I want to be able to develop the game in the club and produce a side which can repeat the success of the side in 2001 when they won the All-Ireland League championship."