diff --git a/AGENTS.md b/AGENTS.md
index 75f2bb7..d134b7a 100644
--- a/AGENTS.md
+++ b/AGENTS.md
@@ -4,12 +4,18 @@ This document contains instructions and documentation references for AI assistan
 
 ## Project Overview
 
-This project implements an OpenAI-compatible API endpoint using FastAPI, with streaming support for LLM responses. The architecture consists of:
+This project implements an OpenAI-compatible API endpoint using FastAPI, with streaming support. Currently returns mock responses - infrastructure prepared for future Ollama/PydanticAI integration.
+
+**Current State**: Production-ready mock API with OpenAI-compatible format
+**Future Integration**: Ollama and PydanticAI (client code ready, not connected)
+
+### Components
 
 - **FastAPI**: Web framework for the API layer
-- **PydanticAI**: Agent framework for LLM integration
-- **Ollama**: LLM backend running on a networked container
-- **Stream Coordinator**: Manages streaming responses in OpenAI-compatible format
+- **SSE-Starlette**: Server-Sent Events for streaming responses
+- **Pydantic**: Request/response validation
+- **PydanticAI**: Dependency installed, ready for future LLM integration
+- **Ollama**: Async client implemented, ready for future connection
 
 ## Documentation References
 
@@ -40,7 +46,8 @@ This project implements an OpenAI-compatible API endpoint using FastAPI, with st
 #### PydanticAI
 - **Official Documentation**: https://ai.pydantic.dev/
 - **Version**: 1.27.0 (Dec 2025)
-- **Key Topics**:
+- **Status**: Dependency installed, ready for future integration
+- **Key Topics** (for future implementation):
   - Agent creation and configuration
   - LLM provider integration (Ollama support)
   - Structured outputs with Pydantic
@@ -53,7 +60,7 @@ This project implements an OpenAI-compatible API endpoint using FastAPI, with st
 
 #### Pydantic
 - **Official Documentation**: https://docs.pydantic.dev/latest/
-- **Version**: 2.10+ (Required for PydanticAI)
+- **Version**: 2.11+ (Required for PydanticAI, currently using >=2.11,<2.13)
 - **Key Topics**:
   - Data validation and serialization
   - Field types and validators
@@ -83,25 +90,31 @@ This project implements an OpenAI-compatible API endpoint using FastAPI, with st
 
 #### Ollama API
 - **Official Documentation**: https://github.com/ollama/ollama/blob/main/docs/api.md
-- **Key Topics**:
+- **Status**: Async client implemented in `src/ollama/client.py`, ready for future integration
+- **Key Topics** (for future implementation):
   - REST API endpoints
   - Streaming responses
   - Model management
   - Generate and chat endpoints
   - Model configuration
+- **Current Model Target**: mistral-nemo:latest
 
 ### OpenAI API Compatibility
 
 #### OpenAI API Reference
 - **Official Documentation**: https://platform.openai.com/docs/api-reference
-- **Key Endpoints to Implement**:
-  - `/v1/chat/completions` - Chat completion with streaming
-  - `/v1/models` - List available models
-  - `/v1/completions` - Text completion (legacy)
-- **Key Features**:
-  - Streaming with Server-Sent Events
-  - Message format compatibility
-  - Response structure compatibility
+- **Implemented Endpoints**:
+  - ✅ `/v1/chat/completions` - Chat completion with streaming (mock responses)
+  - ✅ `/v1/models` - List available models (mock listing)
+- **Future Endpoints**:
+  - 🚧 `/v1/completions` - Text completion (legacy)
+  - 🚧 `/v1/embeddings` - Text embeddings
+- **Implemented Features**:
+  - ✅ Streaming with Server-Sent Events
+  - ✅ Message format compatibility
+  - ✅ Response structure compatibility
+  - ✅ OpenAI error format
+  - ✅ Request validation with Pydantic
 
 ## FastAPI Best Practices
 
@@ -270,55 +283,68 @@ app = create_application()
 
 ## Development Guidelines
 
-### Code Structure
-- Use async/await for ALL I/O operations (database, HTTP, file access)
-- Use sync (def) for blocking SDKs or CPU-intensive work
-- Implement proper error handling and logging
-- Follow dependency injection for validation and shared resources
-- Use Pydantic models for ALL request/response validation
-- Keep business logic in service modules, not routers
+### Code Structure (Current Implementation)
+- ✅ Use async/await for ALL I/O operations (database, HTTP, file access)
+- ✅ Use sync (def) for blocking SDKs or CPU-intensive work
+- ✅ Implement proper error handling and logging
+- ✅ Follow dependency injection for validation and shared resources
+- ✅ Use Pydantic models for ALL request/response validation
+- ✅ Keep business logic in service modules, not routers
+- ✅ Domain-based project structure (not file-type based)
 
 ### Security Considerations
-- Validate all inputs using Pydantic models
-- Implement rate limiting for API endpoints
-- Use environment variables for sensitive configuration
-- Keep dependencies updated (check for CVEs regularly)
+- ✅ Validate all inputs using Pydantic models
+- ✅ Use environment variables for sensitive configuration
+- ✅ Keep dependencies updated (all CVE-checked as of 2025-12-06)
+- ✅ Minor version locking for supply chain protection
+- 🚧 Implement rate limiting for API endpoints (future)
+- 🚧 Add authentication/API keys (future)
 
-### Testing
-- Write integration tests for API endpoints
-- Test streaming functionality thoroughly
-- Mock Ollama responses for unit tests
-- Validate OpenAI API compatibility
+### Testing (Current Coverage: 62%)
+- ✅ Integration tests for API endpoints
+- ✅ Streaming functionality with 20s timeout protection
+- ✅ Async test support with pytest-asyncio
+- ✅ Validate OpenAI API compatibility
+- ✅ Mock responses for all endpoints
+- 🚧 Future: Mock Ollama responses when integrated
 
 ### Configuration
-- Use `.env` files for local development
-- Document all environment variables in README
-- Provide sensible defaults where possible
-- Support container-based configuration
+- ✅ Use `.env` files for local development
+- ✅ Document all environment variables in README
+- ✅ Provide sensible defaults where possible
+- ✅ BaseSettings from pydantic-settings
+- 🚧 Support container-based configuration (future)
 
 ## Common Patterns
 
-### Streaming Response Pattern
+### Streaming Response Pattern (✅ Implemented)
+
+See `src/chat/router.py` for the current implementation:
+
 ```python
 from sse_starlette.sse import EventSourceResponse
 from fastapi import FastAPI
 
 async def event_generator():
-    # Stream events from Ollama/PydanticAI
-    yield {"data": "chunk1"}
-    yield {"data": "chunk2"}
+    # Currently yields mock lorem ipsum chunks
+    # Future: Stream from Ollama/PydanticAI
+    yield {"data": chunk.model_dump_json()}
+    yield {"data": "[DONE]"}
 
-@app.get("/stream")
+@app.post("/stream")
 async def stream():
     return EventSourceResponse(event_generator())
 ```
 
-### PydanticAI Agent Pattern
+### PydanticAI Agent Pattern (🚧 Future Reference)
+
+For future integration when connecting to Ollama:
+
 ```python
 from pydantic_ai import Agent
 
 agent = Agent(
-    'ollama:llama2',  # Or other Ollama model
+    'ollama:mistral-nemo',  # Target model
     # Configuration here
 )
 
@@ -326,13 +352,16 @@ agent = Agent(
 result = await agent.run('Your prompt')
 ```
 
-### OpenAI-Compatible Response Format
+### OpenAI-Compatible Response Format (✅ Implemented)
+
+Current implementation in `src/chat/schemas.py`:
+
 ```python
 {
     "id": "chatcmpl-123",
     "object": "chat.completion.chunk",
     "created": 1234567890,
-    "model": "model-name",
+    "model": "mistral-nemo:latest",
     "choices": [{
         "index": 0,
         "delta": {"content": "response"},
@@ -349,4 +378,4 @@ This document should be updated when:
 - Breaking API changes occur
 - Security vulnerabilities are discovered
 
-Last updated: 2025-12-05
+Last updated: 2025-12-06
diff --git a/CHANGELOG.md b/CHANGELOG.md
index 6a5c789..b076d3a 100644
--- a/CHANGELOG.md
+++ b/CHANGELOG.md
@@ -33,7 +33,7 @@ and this project adheres to [Semantic Versioning](https://semver.org/spec/v2.0.0
 - Project initialization
 - Python 3.12.11 environment
 - FastAPI 0.123.9 web framework
-- PydanticAI 1.27.0 for LLM integration
+- PydanticAI 1.27.0 dependency (ready for future integration)
 - Mock chat completions (lorem ipsum responses)
 - Mock model listing (mistral-nemo:latest)
 - Testing infrastructure (pytest, coverage, ruff, mypy)
diff --git a/README.md b/README.md
index ac51b34..81763f5 100644
--- a/README.md
+++ b/README.md
@@ -1,43 +1,36 @@
-# OpenAI-Compatible API with Ollama Backend
+# OpenAI-Compatible API
 
-A FastAPI-based service that provides an OpenAI-compatible API endpoint, powered by PydanticAI and Ollama for LLM inference.
+A FastAPI-based service that provides OpenAI-compatible API endpoints with streaming support. Currently returns mock responses - ready for future Ollama/PydanticAI integration.
 
-## Architecture
+## Current Status
 
-```
-┌─────────────┐      ┌──────────────────┐      ┌─────────────┐
-│   Client    │─────▶│  FastAPI Server  │─────▶│   Ollama    │
-│             │◀─────│ (Stream Coord.)  │◀─────│  Container  │
-└─────────────┘      └──────────────────┘      └─────────────┘
-                              │
-                              ▼
-                        ┌──────────┐
-                        │Pydantic  │
-                        │   AI     │
-                        └──────────┘
-```
+**✅ Production-ready mock API** with OpenAI-compatible format
+**🚧 Ollama/PydanticAI integration** prepared but not connected
 
-### Components
+## Components
 
 - **FastAPI**: High-performance web framework providing the API layer
-- **Stream Coordinator**: Manages streaming responses in OpenAI-compatible format
-- **PydanticAI**: Agent framework handling LLM integration and structured outputs
-- **Ollama**: External LLM backend (networked, managed separately)
 - **SSE-Starlette**: Server-Sent Events for streaming responses
+- **Pydantic**: Type-safe request/response handling and validation
+- **Ollama Client**: Async HTTP client prepared for future integration
+- **PydanticAI**: Ready for LLM integration (not yet connected)
 
 ## Features
 
-- OpenAI-compatible API endpoints
-- Streaming responses with Server-Sent Events
-- PydanticAI integration for robust LLM interactions
-- Networked Ollama support
-- Type-safe request/response handling with Pydantic
-- Async/await throughout for optimal performance
+- ✅ OpenAI-compatible API endpoints (`/v1/chat/completions`, `/v1/models`)
+- ✅ Streaming responses with Server-Sent Events (SSE)
+- ✅ Type-safe request/response handling with Pydantic
+- ✅ Async/await throughout for optimal performance
+- ✅ Comprehensive test suite (62% coverage)
+- ✅ Domain-based architecture following FastAPI best practices
+- 🚧 Ollama integration (client ready, not connected)
+- 🚧 PydanticAI integration (dependency installed, not connected)
 
 ## Requirements
 
 - Python 3.12+ (Python 3.12.11 recommended for security)
-- Network access to an existing Ollama instance (managed externally)
+- No external dependencies required for mock API
+- (Future: Network access to Ollama instance for LLM integration)
 
 ## Installation
 
@@ -61,32 +54,32 @@ source venv/bin/activate  # On Windows: venv\Scripts\activate
 pip install -r requirements.txt
 ```
 
-### 4. Configure environment variables
+### 4. Configure environment variables (Optional)
 
-Create a `.env` file in the project root:
+Create a `.env` file in the project root for custom configuration:
 
 ```env
-# Ollama Configuration (point to your existing Ollama instance)
-OLLAMA_HOST=http://your-ollama-host:11434
-OLLAMA_MODEL=llama2
-
 # API Configuration
 API_HOST=0.0.0.0
 API_PORT=8000
-API_RELOAD=true
 
 # Logging
-LOG_LEVEL=info
+LOG_LEVEL=INFO
+
+# Future Ollama Configuration (not yet integrated)
+# OLLAMA_HOST=http://localhost:11434
+# OLLAMA_DEFAULT_MODEL=mistral-nemo:latest
+# OLLAMA_TIMEOUT=120
 ```
 
-**Note**: Update `OLLAMA_HOST` to point to your existing Ollama instance. Ensure the Ollama service is accessible from your network and has the required models installed.
+**Note**: The API works with defaults. Environment variables are optional for customization. Ollama configuration is prepared but not currently used.
 
 ## Usage
 
 ### Start the development server
 
 ```bash
-uvicorn main:app --reload
+uvicorn src.main:app --reload
 ```
 
 The API will be available at `http://localhost:8000`
@@ -95,11 +88,13 @@ The API will be available at `http://localhost:8000`
 
 #### Chat Completions (OpenAI-compatible)
 
+Returns mock lorem ipsum responses:
+
 ```bash
 curl http://localhost:8000/v1/chat/completions \
   -H "Content-Type: application/json" \
   -d '{
-    "model": "llama2",
+    "model": "mistral-nemo:latest",
     "messages": [
       {"role": "user", "content": "Hello, how are you?"}
     ],
@@ -109,10 +104,14 @@ curl http://localhost:8000/v1/chat/completions \
 
 #### List Models
 
+Returns mock model listing:
+
 ```bash
 curl http://localhost:8000/v1/models
 ```
 
+Response: `{"object": "list", "data": [{"id": "mistral-nemo:latest", ...}]}`
+
 ### Interactive API Documentation
 
 - Swagger UI: `http://localhost:8000/docs`
@@ -124,11 +123,11 @@ curl http://localhost:8000/v1/models
 
 This project uses minor version locking (`>=X.Y,<X.(Y+1)`) to protect against supply chain attacks while allowing patch updates. All dependencies have been:
 
-- Checked for known CVEs (as of 2025-12-05)
+- Checked for known CVEs (as of 2025-12-06)
 - Pinned to secure minor versions
 - Documented with version rationale in `requirements.txt`
 
-### CVE Status (2025-12-05)
+### CVE Status (2025-12-06)
 
 - **FastAPI 0.123.9**: No known vulnerabilities
 - **Uvicorn 0.38.0**: No known vulnerabilities
@@ -228,10 +227,15 @@ The API is currently set up with **mock responses** for development:
 
 ```bash
 # Install test dependencies
-pip install pytest pytest-asyncio httpx
+pip install -r requirements-dev.txt
 
 # Run tests
 pytest
+
+# Run tests with coverage
+pytest --cov=src --cov-report=term-missing
+
+# Current coverage: 62%
 ```
 
 ## Documentation
@@ -257,27 +261,28 @@ docker-compose up -d
 - Set up monitoring and logging
 - Use a process manager (systemd/supervisor)
 - Configure proper resource limits
-- Ensure reliable network connectivity to Ollama instance
-- Consider Ollama failover/redundancy strategies
+- (Future) Ensure reliable network connectivity to Ollama instance
+- (Future) Consider Ollama failover/redundancy strategies
 
 ## Troubleshooting
 
 ### Common Issues
 
-**Issue**: Cannot connect to Ollama
-- Verify `OLLAMA_HOST` in `.env` points to the correct address
-- Ensure the Ollama instance is running and accessible
-- Check network connectivity and firewall rules
-- Test connectivity: `curl http://your-ollama-host:11434/api/tags`
+**Issue**: Import errors
+- Ensure virtual environment is activated
+- Reinstall dependencies: `pip install -r requirements.txt`
+- Verify Python 3.12+ is being used
 
 **Issue**: Streaming not working
 - Verify SSE-Starlette is installed
 - Check client supports Server-Sent Events
 - Review browser/tool compatibility
+- Check test suite: `pytest tests/chat/test_router.py -k streaming`
 
-**Issue**: Import errors
-- Ensure virtual environment is activated
-- Reinstall dependencies: `pip install -r requirements.txt`
+**Issue**: Tests failing
+- Install test dependencies: `pip install -r requirements-dev.txt`
+- Check async test configuration in `pytest.ini`
+- Run with verbose output: `pytest -v`
 
 ## Contributing
 
@@ -291,14 +296,7 @@ docker-compose up -d
 
 [Add your license here]
 
-## Changelog
-
-### 2025-12-05 - Initial Setup
-- Project structure created
-- Dependencies configured with CVE checks
-- Security: Minor version locking implemented
-- Documentation added
-
 ---
 
+For detailed changelog, see [CHANGELOG.md](CHANGELOG.md).
 For AI assistant instructions and package documentation, see [AGENTS.md](AGENTS.md).