diff --git a/openhands/runtime/utils/runtime_templates/Dockerfile.j2 b/openhands/runtime/utils/runtime_templates/Dockerfile.j2
index 2dfd960505157..746165cae0cd5 100644
--- a/openhands/runtime/utils/runtime_templates/Dockerfile.j2
+++ b/openhands/runtime/utils/runtime_templates/Dockerfile.j2
@@ -63,7 +63,10 @@ RUN if [ -z "${RELEASE_TAG}" ]; then \
     tar -xzf ${RELEASE_TAG}-linux-${arch}.tar.gz && \
     mv -f ${RELEASE_TAG}-linux-${arch} ${OPENVSCODE_SERVER_ROOT} && \
     cp ${OPENVSCODE_SERVER_ROOT}/bin/remote-cli/openvscode-server ${OPENVSCODE_SERVER_ROOT}/bin/remote-cli/code && \
-    rm -f ${RELEASE_TAG}-linux-${arch}.tar.gz
+    rm -f ${RELEASE_TAG}-linux-${arch}.tar.gz && \
+    # Install our custom extension
+    mkdir -p ${OPENVSCODE_SERVER_ROOT}/extensions/openhands-hello-world && \
+    cp -r /openhands/code/openhands/runtime/utils/vscode-extensions/hello-world/* ${OPENVSCODE_SERVER_ROOT}/extensions/openhands-hello-world/
 
 {% endmacro %}
 
@@ -102,7 +105,6 @@ RUN \
 # rather than the current OpenHands release
 
 {{ setup_base_system() }}
-{{ setup_vscode_server() }}
 
 # Install micromamba
 RUN mkdir -p /openhands/micromamba/bin && \
@@ -137,6 +139,8 @@ COPY ./code/pyproject.toml ./code/poetry.lock /openhands/code/
 COPY ./code/openhands /openhands/code/openhands
 RUN chmod a+rwx /openhands/code/openhands/__init__.py
 
+{{ setup_vscode_server() }}
+
 # ================================================================
 # END: Build from versioned image
 # ================================================================
diff --git a/openhands/runtime/utils/vscode-extensions/hello-world/extension.js b/openhands/runtime/utils/vscode-extensions/hello-world/extension.js
new file mode 100644
index 0000000000000..57e06488b68c1
--- /dev/null
+++ b/openhands/runtime/utils/vscode-extensions/hello-world/extension.js
@@ -0,0 +1,16 @@
+const vscode = require('vscode');
+
+function activate(context) {
+    let disposable = vscode.commands.registerCommand('openhands-hello-world.helloWorld', function () {
+        vscode.window.showInformationMessage('Hello from OpenHands!');
+    });
+
+    context.subscriptions.push(disposable);
+}
+
+function deactivate() {}
+
+module.exports = {
+    activate,
+    deactivate
+}
\ No newline at end of file
diff --git a/openhands/runtime/utils/vscode-extensions/hello-world/package.json b/openhands/runtime/utils/vscode-extensions/hello-world/package.json
new file mode 100644
index 0000000000000..5c057853d69c0
--- /dev/null
+++ b/openhands/runtime/utils/vscode-extensions/hello-world/package.json
@@ -0,0 +1,23 @@
+{
+    "name": "openhands-hello-world",
+    "displayName": "OpenHands Hello World",
+    "description": "A simple hello world extension for OpenHands",
+    "version": "0.0.1",
+    "publisher": "openhands",
+    "engines": {
+        "vscode": "^1.94.0"
+    },
+    "categories": [
+        "Other"
+    ],
+    "activationEvents": [
+        "onCommand:openhands-hello-world.helloWorld"
+    ],
+    "main": "./extension.js",
+    "contributes": {
+        "commands": [{
+            "command": "openhands-hello-world.helloWorld",
+            "title": "Hello World from OpenHands"
+        }]
+    }
+}
\ No newline at end of file