diff --git a/electron/terminal-manager.ts b/electron/terminal-manager.ts
index c4833d2..b128e8a 100644
--- a/electron/terminal-manager.ts
+++ b/electron/terminal-manager.ts
@@ -51,6 +51,8 @@ export class TerminalManager {
       COLUMNS: String(opts.cols),
       LINES: String(opts.rows),
     };
+    // Allow launching Claude Code inside the terminal
+    delete env.CLAUDECODE;
 
     const child = spawn(shell, shellArgs, {
       cwd: opts.cwd,
diff --git a/package-lock.json b/package-lock.json
index 01a6198..212fff3 100644
--- a/package-lock.json
+++ b/package-lock.json
@@ -1,12 +1,12 @@
 {
   "name": "codepilot",
-  "version": "0.34.1",
+  "version": "0.34.2",
   "lockfileVersion": 3,
   "requires": true,
   "packages": {
     "": {
       "name": "codepilot",
-      "version": "0.34.1",
+      "version": "0.34.2",
       "workspaces": [
         "apps/*",
         "packages/*"
diff --git a/package.json b/package.json
index f58b35a..167b239 100644
--- a/package.json
+++ b/package.json
@@ -1,6 +1,6 @@
 {
   "name": "codepilot",
-  "version": "0.34.1",
+  "version": "0.34.2",
   "private": true,
   "workspaces": [
     "apps/*",
diff --git a/src/components/layout/AppShell.tsx b/src/components/layout/AppShell.tsx
index 5142b6e..2d68717 100644
--- a/src/components/layout/AppShell.tsx
+++ b/src/components/layout/AppShell.tsx
@@ -17,7 +17,6 @@ import { ImageGenContext, useImageGenState } from "@/hooks/useImageGen";
 import { BatchImageGenContext, useBatchImageGenState } from "@/hooks/useBatchImageGen";
 import { SplitContext, type SplitSession } from "@/hooks/useSplit";
 import { SplitChatContainer } from "./SplitChatContainer";
-import { TerminalDrawer } from "@/components/terminal/TerminalDrawer";
 import { ErrorBoundary } from "./ErrorBoundary";
 import { getActiveSessionIds, getSnapshot } from "@/lib/stream-session-manager";
 import { useGitStatus } from "@/hooks/useGitStatus";
@@ -69,16 +68,25 @@ export function AppShell({ children }: { children: React.ReactNode }) {
   const pathname = usePathname();
   const router = useRouter();
 
-  const [chatListOpenRaw, setChatListOpenRaw] = useState(() => {
-    if (typeof window === "undefined") return false;
-    return window.matchMedia(`(min-width: ${LG_BREAKPOINT}px)`).matches;
-  });
+  const [chatListOpenRaw, setChatListOpenRaw] = useState(false);
+
+  // Sync with viewport after hydration to avoid SSR mismatch
+  /* eslint-disable react-hooks/set-state-in-effect */
+  useEffect(() => {
+    setChatListOpenRaw(window.matchMedia(`(min-width: ${LG_BREAKPOINT}px)`).matches);
+  }, []);
+  /* eslint-enable react-hooks/set-state-in-effect */
 
   // Panel width state with localStorage persistence
-  const [chatListWidth, setChatListWidth] = useState(() => {
-    if (typeof window === "undefined") return 240;
-    return parseInt(localStorage.getItem("codepilot_chatlist_width") || "240");
-  });
+  const [chatListWidth, setChatListWidth] = useState(240);
+
+  // Restore persisted width after hydration
+  /* eslint-disable react-hooks/set-state-in-effect */
+  useEffect(() => {
+    const saved = localStorage.getItem("codepilot_chatlist_width");
+    if (saved) setChatListWidth(parseInt(saved));
+  }, []);
+  /* eslint-enable react-hooks/set-state-in-effect */
 
   const handleChatListResize = useCallback((delta: number) => {
     setChatListWidth((w) => Math.min(CHATLIST_MAX, Math.max(CHATLIST_MIN, w + delta)));
@@ -305,17 +313,6 @@ export function AppShell({ children }: { children: React.ReactNode }) {
     return () => mql.removeEventListener("change", handler);
   }, []);
 
-  // Ctrl+` / Cmd+` toggles terminal drawer
-  useEffect(() => {
-    const handler = (e: KeyboardEvent) => {
-      if (e.key === '`' && (e.ctrlKey || e.metaKey)) {
-        e.preventDefault();
-        setTerminalOpen((prev) => !prev);
-      }
-    };
-    window.addEventListener('keydown', handler);
-    return () => window.removeEventListener('keydown', handler);
-  }, []);
 
   // --- Skip-permissions indicator ---
   const [skipPermissionsActive, setSkipPermissionsActive] = useState(false);
@@ -417,7 +414,6 @@ export function AppShell({ children }: { children: React.ReactNode }) {
                       <ErrorBoundary>{children}</ErrorBoundary>
                     )}
                   </main>
-                  {isChatDetailRoute && <TerminalDrawer />}
                 </div>
                 {isChatDetailRoute && <PanelZone />}
               </div>
diff --git a/src/components/layout/UnifiedTopBar.tsx b/src/components/layout/UnifiedTopBar.tsx
index f85c89e..a3e6f85 100644
--- a/src/components/layout/UnifiedTopBar.tsx
+++ b/src/components/layout/UnifiedTopBar.tsx
@@ -7,7 +7,6 @@ import {
   GitCommit,
   CloudArrowUp,
   TreeStructure,
-  Terminal,
   PencilSimple,
   DotOutline,
   CaretDown,
@@ -39,8 +38,6 @@ export function UnifiedTopBar() {
     setFileTreeOpen,
     gitPanelOpen,
     setGitPanelOpen,
-    terminalOpen,
-    setTerminalOpen,
     currentBranch,
     gitDirtyCount,
   } = usePanel();
@@ -291,21 +288,6 @@ export function UnifiedTopBar() {
                 <TooltipContent side="bottom">{t('topBar.git')}</TooltipContent>
               </Tooltip>
 
-              <Tooltip>
-                <TooltipTrigger asChild>
-                  <Button
-                    variant={terminalOpen ? "secondary" : "ghost"}
-                    size="icon-sm"
-                    className={terminalOpen ? "" : "text-muted-foreground hover:text-foreground"}
-                    onClick={() => setTerminalOpen(!terminalOpen)}
-                  >
-                    <Terminal size={16} />
-                    <span className="sr-only">{t('topBar.terminal')}</span>
-                  </Button>
-                </TooltipTrigger>
-                <TooltipContent side="bottom">{t('topBar.terminal')}</TooltipContent>
-              </Tooltip>
-
               <Tooltip>
                 <TooltipTrigger asChild>
                   <Button
diff --git a/src/components/terminal/TerminalInstance.tsx b/src/components/terminal/TerminalInstance.tsx
index d62f2a4..1046670 100644
--- a/src/components/terminal/TerminalInstance.tsx
+++ b/src/components/terminal/TerminalInstance.tsx
@@ -1,6 +1,7 @@
 "use client";
 
-import { useEffect, useRef } from "react";
+import { useEffect, useRef, useState, useCallback } from "react";
+import Ansi from "ansi-to-react";
 import type { useTerminal } from "@/hooks/useTerminal";
 
 interface TerminalInstanceProps {
@@ -8,54 +9,86 @@ interface TerminalInstanceProps {
 }
 
 /**
- * TerminalInstance — renders terminal output as a simple text view.
+ * TerminalInstance — renders terminal output with ANSI color support.
  *
- * Phase 4 v1: Uses a simple <pre> element for output display.
- * xterm.js integration can be added later for full terminal emulation
- * (requires npm install xterm @xterm/addon-fit).
+ * Uses ansi-to-react for ANSI escape code rendering.
+ * xterm.js integration can be added later for full terminal emulation.
  */
 export function TerminalInstance({ terminal }: TerminalInstanceProps) {
-  const outputRef = useRef<HTMLPreElement>(null);
+  const { isElectron, connected, exited, create, write, setOnData } = terminal;
+  const scrollRef = useRef<HTMLDivElement>(null);
   const inputRef = useRef<HTMLInputElement>(null);
-  const outputTextRef = useRef("");
+  const [output, setOutput] = useState("");
+  const bufferRef = useRef("");
+  const rafRef = useRef<number | null>(null);
 
+  // Flush buffered output via rAF to avoid excessive re-renders
+  const flush = useCallback(() => {
+    rafRef.current = null;
+    setOutput(bufferRef.current);
+  }, []);
+
+  // Subscribe to PTY output
   useEffect(() => {
-    terminal.setOnData((data: string) => {
-      outputTextRef.current += data;
-      if (outputRef.current) {
-        outputRef.current.textContent = outputTextRef.current;
-        outputRef.current.scrollTop = outputRef.current.scrollHeight;
+    setOnData((data: string) => {
+      bufferRef.current += data;
+      if (rafRef.current === null) {
+        rafRef.current = requestAnimationFrame(flush);
       }
     });
-  }, [terminal]);
+    return () => {
+      if (rafRef.current !== null) cancelAnimationFrame(rafRef.current);
+    };
+  }, [setOnData, flush]);
+
+  // Auto-scroll on new output
+  useEffect(() => {
+    if (scrollRef.current) {
+      scrollRef.current.scrollTop = scrollRef.current.scrollHeight;
+    }
+  }, [output]);
 
   // Create terminal on mount
   useEffect(() => {
-    if (terminal.isElectron && !terminal.connected && !terminal.exited) {
-      terminal.create(120, 30);
+    if (isElectron && !connected && !exited) {
+      create(120, 30);
     }
-  }, [terminal]);
+  }, [isElectron, connected, exited, create]);
+
+  // Focus input when terminal connects
+  useEffect(() => {
+    inputRef.current?.focus();
+  }, [connected]);
 
   const handleKeyDown = (e: React.KeyboardEvent<HTMLInputElement>) => {
     if (e.key === 'Enter') {
       const value = inputRef.current?.value || '';
-      terminal.write(value + '\n');
+      write(value + '\n');
       if (inputRef.current) inputRef.current.value = '';
     }
   };
 
+  const handleContainerClick = () => {
+    inputRef.current?.focus();
+  };
+
   return (
-    <div className="flex flex-col h-full bg-[#1a1a1a] text-[#d4d4d4] font-mono text-xs">
-      <pre
-        ref={outputRef}
+    <div
+      className="flex flex-col h-full bg-[#1a1a1a] text-[#d4d4d4] font-mono text-xs"
+      onClick={handleContainerClick}
+    >
+      <div
+        ref={scrollRef}
         className="flex-1 overflow-auto p-2 whitespace-pre-wrap break-all"
-      />
+      >
+        <Ansi>{output}</Ansi>
+      </div>
       <div className="flex items-center border-t border-[#333] px-2">
         <span className="text-green-400 mr-1">$</span>
         <input
           ref={inputRef}
           type="text"
-          className="flex-1 bg-transparent border-none outline-none text-xs py-1.5 text-[#d4d4d4]"
+          className="flex-1 bg-transparent border-none outline-none text-xs py-1.5 text-[#d4d4d4] caret-[#d4d4d4]"
           onKeyDown={handleKeyDown}
           autoFocus
           spellCheck={false}