diff --git a/dev_docs/SESSION_STATE.md b/dev_docs/SESSION_STATE.md
index bdabe0a4..bc20a295 100644
--- a/dev_docs/SESSION_STATE.md
+++ b/dev_docs/SESSION_STATE.md
@@ -1,15 +1,39 @@
 # CURRENT AI WORKING SESSION — HANDOVER
 
 **Active AI:** Claude Haiku 4.5
-**Last Updated:** 2026-04-19
+**Last Updated:** 2026-04-19 (Session 2 - Code Refactoring)
 **Current Version:** v1.10.16 (version saved and merged to master)
-**Branch:** refactor/ai-friendly (DO NOT MERGE to dev until all phases complete + user consent)
+**Branch:** refactor/ai-friendly-v2 (Phase 1: Hook Extractions In Progress)
 
 ---
 
-## STATUS: 🟡 IN PROGRESS — PHASE 4 VALIDATION (E2E SELECTORS INCOMPLETE)
+## STATUS: 🟡 IN PROGRESS — REFACTORING PHASE 1 (HOOK EXTRACTIONS)
 
-### Phase 4 Validation Summary
+### Phase 1 Hook Extraction Progress
+**Baseline:** 332 tests passing (291 Vitest + 41 Pytest)
+
+**Completed Extractions:**
+1. ✅ `frontend/hooks/useScanner.ts` — Scanner state, mode, OCR matching (from page.tsx)
+   - Commit: `5b8c6039` refactor: extract useScanner hook from page.tsx
+2. ✅ `frontend/hooks/useStockAdjustment.ts` — Stock adjustment logic (from page.tsx)
+   - Commit: `f5441a7c` refactor: extract useStockAdjustment hook from page.tsx
+3. ✅ `frontend/hooks/useSync.ts` — Sync operations and inventory refresh (from page.tsx)
+   - Commit: `6dfc76ad` refactor: extract useSync hook from page.tsx
+
+**Remaining Frontend Hooks (Phase 1):**
+4. ⏳ `frontend/hooks/useInventoryFilter.ts` — Filter state & search (from inventory/page.tsx)
+5. ⏳ `frontend/hooks/useAIExtraction.ts` — AI wizard logic (from AIOnboarding.tsx)
+
+**Backend Splits (Phase 1):**
+6. ⏳ `backend/routers/auth.py` — LDAP auth & login endpoint (split from users.py)
+7. ⏳ `backend/routers/sync.py` — Bulk sync endpoint (split from operations.py)
+
+**Test Status After Each Extraction:**
+- All tests passing (291 frontend + 41 backend = 332 total)
+- No regressions introduced
+- Hooks properly integrated with component state management
+
+### Previous Phase 4 Validation Summary
 - ✅ Backend (Pytest): **41/41 tests passing**
 - ✅ Frontend (Vitest): **291/291 tests passing**
 - ⚠️ E2E (Playwright): **1/16 login tests pass** — selectors still need fixing